Q3 2016 Real Estate Sentiment Index

Strong Outlook for Refinance Transactions Drives 7.6 Percent Increase in Market Production Confidence

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 5,700 title agents from 50 states have participated in the first five 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 third-quarter survey was conducted in July 2016.

"Market Production," a Leading Indicator, Up 7.6 Percent Over Last Year

Market production, a leading indicator of market activity, is a metric that combines title agents' expectations for changes in both transaction volume and prices over the coming year. Market production increased 7.6 percent this past quarter as compared with a year ago, a gain largely driven by the significant increase in the outlook for refinance transactions.

"By combining title agents' outlook for transaction volume and prices, we can crowd-source the conventional wisdom of title agents and forecast the level of expected market production over the coming year. Generally, title agents are more confident in their expectations for the broader real estate market than they were a year ago," said Mark Fleming, chief economist at First American.

"The surprising continuation of low rates in 2016 dramatically increased confidence by title agents in the growth of refinance transaction volumes during the third quarter. Refinance confidence also offset expectations that purchase volumes will cool, when compared with title agent survey results from the second quarter. The result is a positive improvement in total market production over a year ago."

"Low rates fueled a dramatic 7.2 percent year-over-year increase in title agent optimism for overall transaction volume growth, largely driven by optimism for refinance transaction growth," says Chief Economist Mark Fleming.

Full Year of Data: Crowd-Sourced Title Agent Projections More Accurate than Many Economic Forecasts

It has been a full year since the RESI first shared title agents' predictions for price growth and other key metrics across property types for the year ahead. So, the time is right to ask the question: how accurate is the wisdom of the crowd? In a post late last year, it was discussed that the collective wisdom of the crowd, such as that reported in the RESI survey, is often an accurate forecast -- sometimes more accurate than the models economists build.

Looking back at the survey's 2015 third-quarter results, the crowd-sourced wisdom of title agents forecasted an expectation for residential price growth of 4.8 percent in the year ahead. At the time, Fannie Mae's third-quarter forecast for that same measure was 4.0 percent. Freddie Mac's was 4.1 percent and the Mortgage Bankers Association's was 4.4 percent. Today, First American's house price index estimates that house prices actually increased by approximately 5.1 percent. Keeping in mind that even our historical perspective on house prices is, in fact, an estimate, these results provide significant support for the crowd-sourced wisdom of title agents.

So, what do title agents expect for price growth in the next 12 months? In this quarter's survey, title agents are forecasting residential price growth of 5 percent for the year ahead.

"When we started this survey it was with the belief that forecasts based on crowd-sourced conventional wisdom can provide useful insight," said Fleming. "We are proud to report that after analyzing a year of survey results, title agents' projections were more accurate than many major economic forecasts. As Sir Francis Galton, a Victorian statistician, discovered over a century ago, the crowd will, on average, get the answer right — or at least very close to right."

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

  1. Rhode Island (+46.6%)
  2. Missouri (+40.3%)
  3. Washington (+35.1%)
  4. Colorado (+26.6%)
  5. Virginia (+20.2%)

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

  1. Rhode Island (+53.9%)
  2. Virginia (+37.2%)
  3. Arizona (+34.6%)
  4. Kentucky (+32.9%)
  5. Oklahoma (+28.7%)

States in which title agents predicted the highest residential price increases in the coming year:

  1. Tennessee (+11.1%)
  2. Missouri (+9.7%)
  3. Oregon (+9.2%)
  4. Maine (+8.6%)
  5. Washington (+7.7%)

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

  1. Minnesota (+9.3%)
  2. Kentucky (+9.1%)
  3. Colorado (+8.4%)
  4. Tennessee (+8.3%)
  5. Washington (+7.5%)

Title Agent Outlook for Transaction Volume Growth Trends Positive on Refinance Bullishness in Third Quarter

Overall, title agents surveyed this quarter remain optimistic about transaction volumes across all property and loan types, with a 7.2 percent increase in optimism over a year ago.

When considering refinance transaction volume growth for the year ahead across all property types, title agent optimism jumped 8.5 percent from the past quarter. With the drop in mortgage rates during the third quarter, it is not surprising that optimism for residential refinance transaction growth increased the most dramatically, up 46 percent over a year ago.

While still optimistic, title agent confidence in purchase transaction growth across all property types declined almost 7 percent since last quarter's survey and is down 4.2 percent from the same quarter last year. Nationally, expectations for residential purchase transactions, while still in optimistic territory at an index value of 62.3, declined the most among all property types at 8.8 percent quarter-over-quarter.

Title Agent Optimism for Price Growth Softens

The 2016 third-quarter RESI found that while title agents' confidence in price growth waned slightly from the past quarter, that confidence was still strong for agents from all states, except those in New Mexico, who expect declining prices.

Confidence in retail and residential price growth declined the most, by 6 percent and 4.8 percent respectively, quarter-over-quarter. Title agent confidence in multi-family price growth decreased the least at 0.2 percent nationally quarter-over-quarter. State by state, title agent outlook remained consistently positive for multi-family price growth, except within New Mexico.

Know-Before-You-Owe Implementation Inconsistency Among Lenders Continues to Drive Title Agent Costs

Title agents continue to report that their cost of closing a loan has increased, citing an average increase of $210 per transaction in the third 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 differs dramatically by geography. In the third quarter, title agents in New York indicated the highest increase, at $539, while title agents in Oklahoma indicated the lowest increase at $25.

"Change continues to be 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. "The challenges caused by inconsistent implementation continue to burden title agents with increased costs that can vary substantially by geography."

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.