Q4 2016 Real Estate Sentiment Index

Real Estate Outlook Declines on Election Uncertainty and Heightened Expectations for Fed Rate Hikes

The First American Real Estate Sentiment Index (RESI) showed that in Q4 2016:

  • Market production, a leading indicator of market activity that combines title agents and real estate professionals' expectations for changes in both transaction volume and prices over the coming year, decreased 3.8 percent this past quarter as compared with a year ago.
  • Overall, confidence for transaction volume growth over the next 12 months declined 11.8 percent from Q3 2016 and fell 3.8 percent compared with a year ago.
  • Confidence for growth in purchase transaction volume over the next 12 months remains positive, but declined 8 percent from last quarter and fell 8.8 percent compared with a year ago.
  • Confidence in refinance transaction volume growth over the next 12 months declined by 15.6 percent from last quarter, but is up 2.4 percent compared with a year ago.
  • Prices across all property types are expected to grow by 3.5 percent over the next 12 months, which is down from last quarter's expectation of 4.1 percent.

"Overall, bullishness about transaction volumes in the coming year waned, largely driven by the decline in refinance transaction expectations," said Mark Fleming, chief economist at First American. "Uncertainty leading into the election, as well as increasing confidence in the likelihood of Federal Reserve rate increases, tempered expectations for housing demand and lowered the overall price growth forecast."

Seeking Certainty Again

"Overall, bullishness about transaction volumes in the coming year waned, largely driven by the decline in refinance transaction expectations," said Mark Fleming, chief economist at First American. "Uncertainty leading into the election, as well as increasing confidence in the likelihood of Federal Reserve rate increases, tempered expectations for housing demand and lowered the overall price growth forecast.

"As the decline in overall confidence this quarter has shown, the uncertainty surrounding the Presidential election can have an impact on expectations for the housing market. This survey of title agents and real estate professionals was conducted prior to the election, and survey participants were asked for their perspective on what the outcome of the election might mean for the housing market," said Fleming.

"Based on the responses of title agents and real estate professionals and their relative preference for Donald Trump, it appears that the uncertainty created by increased regulation and the growing complexities of compliance have many title agents and real estate professionals believing that less regulation would be more beneficial to the housing market in the long run. In other words, to the extent that each candidate represents a differentiated perspective on the role of government and regulation in the housing industry, the title agents and real estate professionals surveyed felt less is more.

"Now that Donald Trump is the President-Elect and we have more political certainty, the message of title agents and real estate professionals to the new administration is: provide more regulatory and compliance certainty and the housing market will benefit," said Fleming.

For more discussion of the impact of uncertainty on markets and preliminary RESI results, see the original blog post — Seeking Certainty Again.

Transaction Volume Sentiment Highlights

"When aggregated by state, title agent and real estate professional expectations for growth in residential purchase transactions remain positive in the vast majority of states," said Fleming. "Only four states, Oregon, Kansas, Oklahoma, and Alabama showed decreased title agent and real estate professional expectations for residential purchase transactions over the next 12 months.

"When title agent and real estate professional responses about growth in residential and multifamily purchase transactions are combined, only two states, Kansas and Oregon, showed a decline in expectations," said Fleming.

States with the greatest increase in title agent & real estate professional confidence for residential purchase transaction volume growth as compared with a year ago are:

  1. West Virginia (+66.7%)
  2. Maine (+36.9%)
  3. Mississippi (+24.6%)
  4. Colorado (+19.3%)
  5. Montana (+19.1%)

States with the greatest increase in title agent & real estate professional confidence for multi-family purchase transaction volume growth as compared with a year ago are:

  1. New Mexico (+27.3%)
  2. Ohio (+21.5%)
  3. Maine (+21.0%)
  4. West Virginia (+14.3%)
  5. Indiana (+13.3%)

Price Growth Expectation Highlights

"Industrial and retail property types were the only categories with increased price growth expectations for the next year," said Fleming. "Price growth expectations for multi-family and residential property types declined the most, by 1.4 and 1.1 percentage points respectively, quarter-over-quarter."

States in which title agents & real estate professionals predicted the highest residential price increases in the coming year:

  1. Oklahoma (+12.4%)
  2. Maryland (+9.8%)
  3. Alabama (+9.8%)
  4. Illinois (+9.4%)
  5. Kansas (+9.1%)

States in which title agents & real estate professionals predicted the highest multi-family price increases in the coming year:

  1. New Jersey (+8.6%)
  2. New Hampshire (+7.8%)
  3. Washington (+7.4%)
  4. North Carolina (+5.1%)
  5. Montana (+5.0%)

What do the RESI number values mean?

Title insurance agents and real estate professionals are experts in their local real estate markets and have valuable insight. First American's proprietary Real Estate Sentiment Index is based on a quarterly survey of independent title agents and other real estate professionals, providing a unique gauge on the real estate market using the crowd-sourced wisdom and expertise of real estate experts.

Methodology

The First American Real Estate Sentiment Index (RESI) measures title agent and real estate professional sentiment on purchase and refinance transaction volume and price changes across multiple property types, as well as sentiment on current industry issues. The RESI is calculated for each question as the sum of the positive responses minus the sum of the negative responses divided by two and 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 increasingly positive sentiment and a RESI value below 50 indicates increasingly 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.

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. In 2016, First American was recognized by Fortune® magazine as one of the 100 best companies to work for in America. More information about the company can be found at www.firstam.com.

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.