A top economist spoke on the housing market, which he said fell just short of its potential.

First American Financial Corporation, a global provider of title insurance, settlement services and risk solutions for real estate transactions, today released their proprietary Potential Home Sales model for January 2016.

Their model provides a gauge on how existing home sales compare to the long-run potential level. For January, the model showed that the market potential for existing home sales declined by .2% from December, and by 7.1% year-over-year.  

According to the model, the annualized rate of potential existing home sales is up 76% from the low point reached in February 2009. In the model, in January the rate of potential home sales decreased by 12,000. The most recent peak was in February 2014, where the potential home sales rate was up by 702,000.

Although their was a drop in existing home sales in November to 4.76 million, in December the sales were again up at 5.46 million.

“As we discussed in last month’s release of our Potential Home Sales model, the October to November swoon was not unique to 2015,” First American chief economist Mark Fleming said. “At the time, Pending Homes Sales indicated that there would be a strong rebound in December, as delayed closings due to the Know-Before-You-Owe rule eventually closed. Last month, we argued that the month-over-month volatility was not an indication of any fundamental changes in market conditions. The rebound in December existing-home sales is much more in line with our expectations for market sale activity.”

The gap of forecasted home sales and actual potential home sales for January 2016 was 168,000 sales.

“The market is aligning with its potential,” said Fleming. “Mortgage rates actually declined in January due to the high degree of market volatility and the ‘flight to safety’ that drove down long-term treasury yields, the benchmark underpinning long-term mortgage rates. Originally suggesting that 2016 would be the year in which rates begin normalization, the Fed is now much more likely to slow down the pace of rate normalization due to deterioration in global economic conditions. Is it possible that mortgage rates could break through to new historic lows or remain below 4 percent for another year? As usual, mortgage rate trends will heavily influence housing prices.”

Fleming also addressed house appreciation, and its effect on the market.

“House price appreciation cooled modestly late last year, but could strengthen again based on the leverage assistance that low rates provide to consumers’ purchasing power,” he said. “All else equal, lower rates mean borrowers can bid more for housing. In a market of limited supply, leverage-assisted demand drives prices higher. Actual price appreciation is currently stronger than what is fundamentally supported by market conditions. This leverage-assisted housing inflation could persist if rates remain low. Even though modest increases in mortgage rates this year would not have a dramatic impact on home sales, the likelihood of modest mortgage rate increases seems less likely now.”

Although he said that the market could have been better, Fleming believes that 2016 will be better.

“With the initial delay in closings triggered by Know-Before-You-Owe seemingly behind us, and global economic uncertainty driving down mortgage rates, 2016 remains a year to be bullish on housing,” he said. “First-time homebuyers will be able to benefit from strong purchasing power in a low-rate environment. This year, the housing market may indeed achieve its potential.”