Q1 2017 Real Estate Sentiment Index

Improved Real Estate Outlook Suggests Strong Spring Market

The First American Real Estate Sentiment Index (RESI) showed that in Q1 2017:

  • Overall, confidence for transaction volume growth over the next 12 months increased 0.4 percent from Q4 2016 and increased 0.63 percent compared with a year ago.
  • Confidence for growth in purchase transaction volume over the next 12 months increased 6.5 percent from last quarter and 3.7 percent compared with a year ago.
  • Confidence in refinance transaction volume growth over the next 12 months declined by 5.7 percent from last quarter and fell 2.5 percent compared with a year ago.
  • Prices across all property types are expected to grow by 2.5 percent over the next 12 months, which is up from last quarter's expectation of a 1.7 percent increase.

"Overall, bullishness about transaction volumes in the coming year increased, largely driven by the rise in purchase transaction expectations," said Mark Fleming, chief economist at First American. "Overall, year-end confidence in the healthy trajectory of the economy increased purchase transaction expectations, but the likelihood of higher mortgage rates further tempered refinance prospects."

Rising Rates Not Expected to Slow Down Demand This Spring

Given the strong likelihood of rising mortgage rates in 2017, title agents and real estate professionals were asked to assess how sensitive they thought first-time homebuyers were to rising mortgage rates and at what rate they would withdraw from the market.

"Despite some regional disparities, title agents and real estate professionals do not expect increasing mortgage rates to have a significant impact on the housing market this spring. Continued good economic news, increasing Millennial demand and confidence that buyers will remain in the market even if rates exceed 5 percent bode well for 2017 real estate," said Fleming. "Hopefully, there will be enough supply."

On a national level, title agents and real estate professionals said that the mortgage rate would need to hit 5.4 percent, 1.3 percent above the current rate, before homebuyers declined to enter the market. On a state-by-state level, title agents and real estate professionals viewed home buyers in Arkansas as the least sensitive, believing buyers would not leave the Arkansas market until rates hit 6.2 percent.

North Dakota title agents and real estate professionals reported the lowest threshold rate for buyers to withdraw from the market at 4.5 percent. Even with multiple expected rate increases by the Fed this year, most forecasts suggest mortgage rates will remain below 5 percent, so based on these results, the purchase demand this spring should not be materially impacted by any modest increase in mortgage rates.

This remained true for Millennials and first-time homebuyer demand as 57 percent of the title agents and real estate professionals surveyed agreed that Millennial first-time homebuyer demand will rise regardless of a mortgage rate increase. On a regional level, title agents and real estate professionals in the Midwest were the most confident that first-time homebuyer demand will rise regardless of rate increases. In contrast, the Northeast was the most pessimistic, with title agents and real estate professionals in New York, Vermont, Maine, Connecticut, and New Jersey on average disagreeing that first-time homebuyer demand will rise regardless of rate increases.

Transaction Volume Sentiment Highlights

"When aggregated by state, title agent and real estate professional expectations for growth in residential purchase transactions remain positive in every state," 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. Louisiana (+53.1%)
  2. Mississippi (+35.6%)
  3. New Mexico (+33.0%)
  4. New Hampshire (+27.7%)
  5. Idaho (+26.3%)

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 (+50.0%)
  2. Idaho (+46.7%)
  3. Virginia (+43.1%)
  4. Arkansas (+40.0%)
  5. Texas (+33.9%)

Price Growth Expectation Highlights

"Multi-family property types show the smallest expectation for price growth, an increase of 0.40 percentage points since last quarter," said Fleming. "Outlook for price growth for residential and industrial property types increased the most, by 1.28 and 0.84 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. New Mexico (+8.0%)
  2. South Carolina (+5.9%)
  3. Washington (+5.8%)
  4. Idaho (+5.4%)
  5. Tennessee (+5.4%)

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

  1. Tennessee (+5.2%)
  2. New Mexico (+5.2%)
  3. South Carolina (+4.9%)
  4. Washington (+4.9%)
  5. Alabama (+4.5%)

Millennial Demand

"Millennial first-time buyer demand is expected to be higher this spring than a year ago," said Fleming. "First-time homebuyers are not expected to withdraw from the market unless mortgage rates increase above 5.4 percent."

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.