Outlook for Real Estate Market Falls in Third Quarter Amid Rate Uncertainty, According To First American Real Estate Sentiment Index

While low expectations for refinance transactions dragged overall outlook down year-over-year, expectations for purchase volume growth remain positive due to Millennial demand and economic tailwinds, says Chief Economist Mark Fleming


September 12, 2017, Santa Ana, Calif.

First American Financial Corporation (NYSE: FAF), a leading global provider of title insurance, settlement services and risk solutions for real estate transactions, today released First American’s proprietary Real Estate Sentiment Index (RESI) for the third quarter of 2017. The RESI 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.

Third Quarter 2017 Real Estate Sentiment Index

  • 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.

Chief Economist Analysis: Title Agent and Real Estate Professional Confidence Dips Due to Lower Expectations for Refinance Transactions

“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.”

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,” said Fleming. “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,” said Fleming. “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,” said Fleming.

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,” said Fleming. “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,” said Fleming. “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).”

Third Quarter 2017 RESI Transaction Volume Sentiment Highlights

“The expectation for residential refinance transactions declined the most year-over-year, falling 30 percent,” said Fleming. “Expectations for purchase transaction growth are positive for all property types, except retail.”

  • Residential: The five states with the greatest increase in title agent and real estate professional confidence for residential purchase transaction volume growth as compared with a year ago are: New Mexico (+66.7 percent), Arkansas (+63.6 percent), Indiana (+45.5 percent), Louisiana (+24.9 percent), and Maryland (+18.0 percent).
  • Multi-Family: The five states with the greatest increase in title agent and real estate professional confidence for multi-family purchase transaction volume growth as compared with a year ago are: Indiana (+80.0 percent), Illinois (+73.3 percent), Arkansas (+66.7 percent), New Mexico (+50.0 percent), and Missouri (+45.8 percent).

Third Quarter 2017 RESI Price Growth Expectation Highlights

“Residential property prices are expected to grow 4.4 percent in the coming year, the strongest price forecast among all property types,” said Fleming. “Retail property prices are expected to grow the least at 1.1 percent.”

  • Residential: The five states in which title agents and real estate professionals had the highest predictions for residential price growth in the coming year are: Oklahoma (+12.1 percent), South Carolina (+9.0 percent), Idaho (+8.6 percent), Arkansas (+ 8.3 percent), and Tennessee (+7.5 percent).
  • Multi-Family: The five states in which title agents and real estate professionals had the highest predictions for multi-family property price growth in the coming year are: Vermont (+7.5 percent), Alabama (+6.9 percent), New Hampshire (+6.2 percent), Michigan (+6.1 percent), and Idaho (+5.0 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.

Next Release

The next release of the First American Real Estate Sentiment Index will be posted in December 2017.

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. © 2017 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 total revenue 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 and again in 2017, First American was named to the Fortune 100 Best Companies to Work For® list. More information about the company can be found at www.firstam.com.

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