Q2 2016 Real Estate Sentiment Index

Optimism for Growth in Real Estate Transactions Improves Substantially Over Last Quarter

The First American Real Estate Sentiment Index (RESI) measures title agent sentiment on a variety of key market metrics and industry issues, including expectations for changes in purchase and refinance transaction volume and prices across multiple property types. The RESI is based on a quarterly survey of independent title agents. More than 5,000 title agents from 50 states have participated in the first four editions of the quarterly survey. In 2016, the survey has also tracked title agent sentiment regarding the implementation of the Know-Before-You-Owe rule, also referred to as the TILA-RESPA Integrated Disclosure (TRID) rule. The 2016 second quarter survey was conducted in April 2016.

Title Agent Outlook for Transaction Volume Growth Trends Positive in Second Quarter

Overall, title agents are significantly more optimistic than last quarter about the volume of both purchase and refinance transactions in the year ahead. For purchase transactions, title agents expressed broad-based confidence about the growth in volume across all property types over the next year. Nationally, expectations for residential purchase transactions were the most bullish, increasing 12.9 percent from the first quarter.

Among the mix of commercial property types, title agents were most positive regarding increases in office property transaction volume, a change from the previous quarter, when their outlook for growth in industrial property volume was the most positive.

The outlook for refinance transaction volume among title agents is modestly positive, but much less so than for purchase volume. However, this modestly bullish outlook is a significant change from the previous quarter, when title agents said they expected refinance volume to go down, possibly due to a reduced expectation of higher mortgage interest rates in the coming year.

"Reduced expectations for mortgage rate increases in 2016 significantly improves independent title agent outlook for transaction volumes," says Chief Economist Mark Fleming.

Title Agent Optimism for Overall Market Price Growth Cools Slightly, but Strengthens for Residential Properties

The second-quarter RESI showed that title agents predict price growth across all property types to rise by 4.0 percent in the coming year, a decrease from the 4.6 percent prediction cited in the first quarter.

While expectations for price growth across all property types is cooling, the 2016 second-quarter RESI found that title agents feel more confident about residential property price growth than they did in the first quarter, with that confidence increasing 18.1 percent.

The increased expectation for price growth is likely driven by the spring's shortage of inventory and continued low mortgage rates. State by state, title agents remained strongly positive regarding residential price increases, with the exception of agents in New Mexico who expect declining prices.

Agents were similarly confident in their expectations for multi-family property price increases over the next year, with the exception of title agents in Mississippi. Title agent expectations varied more by state for other commercial property types (retail, office, and industrial).

States with the highest expected residential price changes in the coming year:

  1. Tennessee (+9.8%)
  2. Kentucky (+8.8%)
  3. Idaho (+8.7%)
  4. Wisconsin (+8.5%)
  5. Utah (+8.0%)

States with the highest expected multi-family price changes in the coming year:

  1. Kentucky (+8.3%)
  2. Rhode Island (+7.8%)
  3. Florida (+7.2%)
  4. Idaho (+7.0%)
  5. Tennessee (+6.3%)

States with the highest expectation for an increase in cancellation rates:

  1. New Jersey (79)
  2. New Mexico (69)
  3. Tennessee (58)
  4. Indiana (57)
  5. Kansas (57)

States with the highest expectation for a decrease in cancellation rates:

  1. Montana (33)
  2. Louisiana (44)
  3. Maryland (44)
  4. Ohio (45)
  5. Michigan (46)

Property Valuation Issues As the Most Likely Cause of Cancellation

The 2016 second-quarter RESI found that title agents believe that property valuation issues will be the most likely cause of title order cancellations over the coming year, followed by buyer inability to obtain mortgages and unresolved home inspection/structural issues. Title agents expect property valuation issues to increase the most in the next 12 months among the reasons for cancellation, followed by higher purchase offers. Expectations that the rate of title policy order cancellations will increase in the next year fell 5.6 percent from the previous quarter.

"Market Production," a Leading Indicator, Increases in the Second Quarter

Title agent expectations for market production, a potential leading indicator of real estate market direction, increased 2.5 percent from the first quarter of 2016.

"Market production is a metric that combines title agent expectations for transaction volumes and price changes over the coming year," said Mark Fleming, chief economist at First American. "Increased confidence in the growth of purchase and refinance volume in the second quarter helped to offset expectations that price increases will cool to a 4.0 percent growth level."

Title Agents' Expectations for Closing Delays Due to Know-Before-You-Owe Lessens, While They Believe Consumers' Understanding of the Closing Process is Improving

Title agents are less likely to believe that Know-Before-You-Owe will cause closing delays during the spring home-buying season than they were in the first quarter. Title agents still believe that Know-Before-You-Owe will cause delays, but that feeling has decreased by nearly 20 percent since the first quarter, which indicates the marketplace is adapting to the new process and forms.

Title agents continue to report that their cost of closing a loan has increased, citing an average increase of $184 per transaction in the second quarter. However, they also note that the increases are not necessarily due to Know-Before-You-Owe directly, but a result of the varied approaches to rule implementation taken by lending institutions. These variances, they say, are forcing title agents to create different closing procedures for each lender with which they work, contributing to increased costs for title agents. The increase in cost per transaction due to this differs dramatically by geography. Title agents in New Mexico indicated the highest increase, at $313, while title agents in Indiana indicated the lowest increase at $58.

The independent title agents surveyed feel that consumer understanding of the closing process is gradually improving," said Fleming. "While sentiment regarding this remains negative, there was a 74.7 percent improvement over the past quarter in how well title agents believe consumers' understanding of the closing has improved due to Know-Before-You-Owe.

"Change is difficult, and the implementation of the new Know-Before-You-Owe processes and forms was a challenge for title agents as well as lenders, requiring significant investments in new technology and time," said Fleming. "Based on our survey, title agents' belief that the new rules are benefiting consumers is improving and that closing delays are declining. We are all getting used to the new normal."

Methodology

The First American Real Estate Sentiment Index (RESI) is based on a quarterly survey of title agents that do business with First American, providing a unique gauge on the real estate market from the sentiment of real estate experts. The RESI measures title agents' expectations for changes in real estate prices across multiple property types and expectations for changes in the volume of purchase and refinance transactions. The RESI also ranks the reasons for title order cancellations and gauges title agent sentiment on important industry issues or events. Sentiment is measured by asking respondents to answer questions on a scale of negative, neutral or positive options. The RESI is calculated for each question as the sum of the positive responses minus the sum of the negative responses divided by two times the total number of responses plus 50, resulting in an index that varies from 0 (all negative sentiment) to 50 (neutral sentiment) to 100 (all positive sentiment). A RESI value above 50 indicates increasing positive sentiment and a RESI value below 50 indicates increasing negative sentiment. Aggregated purchase and refinance sentiment indices are created by using a property-type stock-weighted average of each underlying sentiment index. The overall national sentiment index is a loan purpose market share-weighted average of the aggregate purchase and refinance sentiment indices. Aggregated national price expectations are property-type state stock weighted. Results are only reported when a sufficient number of survey responses are available to produce valid results. As the survey is conducted in the coming year, an overall market-level RESI will be created as the weighted combination of the underlying survey components.

About First American

First American Financial Corporation (NYSE: FAF) is a leading provider of title insurance, settlement services and risk solutions for real estate transactions that traces its heritage back to 1889. First American also provides title plant management services; title and other real property records and images; valuation products and services; home warranty products; property and casualty insurance; and banking, trust and investment advisory services. With revenues of $5.2 billion in 2015, the company offers its products and services directly and through its agents throughout the United States and abroad.

Opinions, estimates, forecasts and other views contained in this page are those of First American's Chief Economist, do not necessarily represent the views of First American or its management, should not be construed as indicating First American's business prospects or expected results, and are subject to change without notice. Although the First American Economics team attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. © 2016 by First American. Information from this page may be used with proper attribution.