Fed Rate Increase Will Impact First-Time Homebuyer Demand Most, According to First American Real Estate Sentiment Index

First American Financial Corporation (NYSE: FAF), a leading global provider of title insurance, settlement services and risk solutions for real estate transactions, today released its fourth quarter Real Estate Sentiment Index (RESI), which measures title agent sentiment on a variety of key market metrics and industry issues, including expectations for price changes across multiple property types, and expectations for changes in volume for purchase and refinance transactions. The RESI is based on a quarterly survey of title agents that do business with First American. More than 3,000 title agents from 50 states have participated in the first two editions of the quarterly survey. The fourth quarter survey, which was conducted in October 2015, also measured title agent sentiment regarding homeownership demand.

Homeownership Demand Outlook

Title agents overwhelmingly agree that sale transactions will increase for first time homebuyers and “move-up homebuyers” in the next year. Title agent sentiment on sales varies state-by-state for luxury homebuyers and second/vacation homebuyers, however, sentiment remains positive on a national scale.  

“Title agents view first-time homebuyers as most impacted by a potential interest rate hike, while remaining optimistic regarding the level of sale transactions for those first-time homebuyers in the next 12 months,” said Fleming. “Expectations for future homeownership demand remain positive, despite changing market conditions.”

Title agents believe interest rates would need to reach 5.1 percent before impacting primary residential transaction volumes. Title agents viewed industrial property transaction volume as the most resilient to interest rate increases. They cited 6.3 percent as the interest rate level at which industrial property transaction volumes would be impacted.  

Title Agents Expect Residential Property Price and Transaction Volume Growth in 2016, but Optimism Falls from Third Quarter

The fourth quarter RESI found that title agent sentiment at a state-by-state level for residential price increases remains overwhelmingly positive, but this positive sentiment has dropped since the previous quarter. Overall, title agents indicated that they expect residential property prices to increase by 5.7 percent on average over the next year, which is down from the 6.7 percent they indicated the previous quarter. For multi-family properties, sentiment among title agents is similarly positive for price increases over the next year, but sentiment varies by state for commercial property types (retail, office, and industrial). While still positive overall, title agent sentiment for price increases declined across all property types from the third quarter to fourth quarter. Sentiment among title agents for residential property price growth dropped the most, declining from 77 in the third quarter to 63 in the fourth quarter.

Title agents also expressed broad-based confidence across all property types in the outlook for growth in purchase transaction volumes over the next year. The RESI value for residential purchase transactions was the most positive at 73, down from 78 in the third quarter. Conversely, the outlook for refinance transaction volume among title agents is consistently negative, with the exception of multi-family property types. Multi-family properties show a slight positive outlook, although it has also fallen since the third quarter.

Leading Cause of Title Order Cancellations for Next Year Remain Unchanged

The RESI also measures title agent sentiment on reasons for title policy order cancellations. The fourth quarter RESI found that title agents continue to believe that property valuation issues will be the most likely cause of title order cancellation over the coming year, followed by a higher purchase offer being received and unresolved title issues. Currently, title agents ranked the inability of buyers to obtain a mortgage as the most frequent cause of a title policy cancellation, which is unchanged from the third quarter.  Property valuation issues and unresolved home inspection/structural issues followed in rankings of current reasons for title policy cancellations. Expectations that the rate of title policy order cancellations will increase in the next year grew slightly since the third quarter, with the RESI value moving up from 56 to 57.

4th Quarter 2015 RESI Price Expectation Highlights

• Residential: The five states with the highest expected residential price changes in the coming year are: District of Columbia (+8.5 percent), New Hampshire (+8.1 percent), Nevada (+8.0 percent), Michigan (+7.9 percent) and Florida (+7.8 percent).
• Multi-Family: The five states with the highest expected multi-family price changes in the coming year are: Colorado (+10.1 percent), Nevada (9.3 percent), Kentucky (+9.0 percent), Vermont (+8.6 percent) and Texas (+8.3 percent).

4th Quarter RESI Title Policy Cancellation Reason Highlights

• The five states with the highest expectation for an increase in cancellation rates are: New Mexico (75), Washington (71), Arkansas (70), Missouri (36) and Nebraska (68).
• The five states with the highest expectation for a decrease in cancellation rates are: Kentucky (45), Minnesota (47), Oklahoma (48), Maine (48) and Rhode Island (50).

Next Release

The next release of the First American Real Estate Sentiment Index will be posted in March 2016.

Methodology

The methodology statement for the First American Real Estate Sentiment Index is available at http://www.firstam.com/economics/real-estate-sentiment-index.  

Disclaimer

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. © 2015 by First American. Information from this page may be used with proper attribution.

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 $4.7 billion in 2014, the company offers its products and services directly and through its agents throughout the United States and abroad. More information about the company can be found at www.firstam.com.