First American Financial Corp., a global provider of title insurance, settlement services and risk solutions for real estate transactions, released First American’s proprietary Existing-Home Sales Capacity (EHS-C) model for October 2015, which provides a gauge on whether existing-home sales are under capacity or over capacity based on current market fundamentals. The EHS-C rate decreased by 3.1 percent compared with September and by 7.3 percent compared with a year ago.
The seasonally adjusted, annualized rate (SAAR) of existing-home sales capacity is up 73.6 percent from the low point of sales reached in February 2009. The EHS-C decreased by 181,500 sales (SAAR) in October.
EHS-C is down 779,000 sales (SAAR) from the most recent peak in February 2014. The current underperformance gap is an estimated 209,000 (SAAR), which is significantly less than the sales capacity gap of 1.7 million existing-home sales in February 2014.
“The housing market’s capacity for existing-home sales is declining, with the expectation of a Fed rate increase pre-adjusting mortgage rates and causing a slowdown in house price appreciation,” First American Chief Economist Mark Fleming said. “Market capacity remains modestly in excess of actual sales due to leverage-assisted housing asset inflation, which is home price appreciation fueled by low mortgage rates. Rising mortgage interest rates and moderation in house price appreciation were the most important market fundamentals that reduced market capacity this month. Now that interest rates are pre-adjusting in response to signals from the Fed for a highly expected increase in December, demand is also declining.
“An increase in rates on the part of the Fed, causing mortgage rates to rise, can actually be good for the housing market in the long run. Continued low mortgage rates are a contributing factor to the pace of price appreciation that we have seen in the housing market over the past three years,” Fleming said. “Leverage-assisted housing asset inflation is a significant contributing factor to the market capacity for existing-home sales exceeding actual existing-home sales. The longer rates remain low, the longer leverage-assisted housing asset inflation outpaces income growth and reduces affordability for the first-time homebuyer.”
Actual existing-home sales were estimated to be 5.55 million (SAAR) in September. Early forecasts for October actual existing-home sales predict a significant drop from that total.
“Based on our EHS-C model, I estimate that actual existing-home sales in October will be 5.44 million (SAAR),” Fleming said. “Looking ahead to 2016, I expect existing-home sales to reach 5.5 million by the end of the year. Housing demand is expected to be increasingly dominated by the first-time homebuyer, as existing homeowners will have a reduced incentive to sell in a higher rate environment.”