Q3 2017 Real Estate Sentiment Index

Outlook for Real Estate Market Falls in Third Quarter Amid Rate Uncertainty

The First American Real Estate Sentiment Index (RESI) showed that in Q3 2017:

  • Overall, confidence for transaction volume growth over the next 12 months decreased 4.8 percent from Q2 2017 and decreased 9.7 percent compared with a year ago.
  • Confidence for growth in purchase transaction volume over the next 12 months decreased 5.6 percent from last quarter, but was up 0.2 percent compared with a year ago.
  • Confidence in refinance transaction volume growth over the next 12 months decreased by 3.8 percent from last quarter and fell 20 percent compared with a year ago.
  • Prices across all property types are expected to increase by 0.27 percentage points over the next 12 months compared to last quarter.

Mark Explains the Real Estate Sentiment Index

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"Overall, confidence among title agents and real estate professionals in transaction volume growth in the coming year fell this quarter by 4.8 percent. The decrease was primarily driven by the drop in expectations for refinance volumes, which dropped 3.8 percent from last quarter, and 19.7 percent year-over-year," said Mark Fleming, chief economist at First American. "Strong Millennial demand continues to keep expectations for purchase volume growth positive overall, while expectations for a rate increase in September may be causing refinance expectations to fall."

Transaction Volume Sentiment Highlights

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. New Mexico (+66.7%)
  2. Arkansas (+63.6%)
  3. Indiana (+45.5%)
  4. Louisiana (+24.9%)
  5. Maryland (+18.0%)

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. Indiana (+80.0%)
  2. Illinois (+73.3%)
  3. Arkansas (+66.7%)
  4. New Mexico (+50.0%)
  5. Missouri (+45.8%)

Price Growth Expectation Highlights

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

  1. Oklahoma (+12.1%)
  2. South Carolina (+9.0%)
  3. Idaho (+8.6%)
  4. Arkansas (+8.3%)
  5. Tennessee (+7.5%)

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

  1. Vermont (+7.5%)
  2. Alabama (+6.9%)
  3. New Hampshire (+6.2%)
  4. Michigan (+6.1%)
  5. Idaho (+5.0%)

The Housing Supply Shortage

In many parts of the nation, the 2017 housing market has been defined by the shrinking number of homes for sale amid strong demand. In the third quarter RESI survey, 66 percent of title agents and real estate professionals indicated that there is a shortage of inventory of homes for sale in their home markets. Approximately, 77 percent of title agents and real estate professionals characterized the severity of the shortage of homes for sale as moderate or high. In fact, 81 percent of title agents and real estate professionals agreed that the lack of inventory is the primary reason for house price appreciation in their market, with 20 percent of those strongly agreeing with this statement.

So, if home prices are increasing, what's preventing homeowners from selling their homes?

Title agents and real estate professionals were also asked to identify what they believe is the top reason for the lack of inventory in their markets. Almost half of the respondents cited that existing homeowners are worried that they will not be able to find something to buy as the main reason. Interestingly, 26 percent claimed that first-time homebuyer demand is absorbing a large share of available homes as their top reason. This was followed by existing homeowners' mortgage rate is lower than the current market rate (11.3 percent), insufficient or negative equity (10.6 percent), and lastly, foreign buyer demand is absorbing a large share of available homes (4.6 percent). The survey findings suggest that the prisoner's dilemma phenomenon continues to play out in real estate markets across the country, as demand for existing homes grows, while sellers are increasingly unwilling to list their homes for sale.

Opinion Survey Data

Excess Inventory is the Real Estate Story in Some Markets

While tight inventory and strong demand typified much of the nation's housing markets, there are some markets confronted with excess inventory. More than a third (34 percent) of title agents and real estate professionals surveyed indicated that their market is not suffering from a shortage of inventory of homes for sale. The states with the highest number of respondents that claimed there was no shortage were: Florida, Connecticut, and Louisiana. Among those title agents and real estate professionals in markets not suffering from a shortage of inventory, 55.5 percent characterized the severity of the excess supply of homes for sale as high (8 percent) or moderate (47.5 percent), with 28 percent characterizing the excess supply as low and 16 percent saying it is negligible.

Among those title agents and real estate professionals who indicated that their market is not suffering from a supply shortage, when asked to identify the top reason for the availability of supply in their markets, 47.5 percent of the survey respondents indicated the lack of first-time home buyer demand as the main reason for the availability of inventory. Most of the survey respondents that cited lack of first-time home buyer demand as the reason for the availability of inventory were based in Connecticut, Louisiana, West Virginia, and Florida. The second-most cited reason for the availability of inventory was more new homes built recently than the market needs (23.3 percent), followed by bank owned (REO) properties for sale (14.8 percent), and rental investment properties for sale either to new investors or homeowners (14.4 percent).

Survey: Reasons for Availability

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 sentiment on purchase and refinance transaction volume and price changes across multiple property types, as well as title agent 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 $5.6 billion in 2016, 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. © 2017 by First American. Information from this page may be used with proper attribution.