First-Time Home Buyer Demand Resilient to Rising Rates, According to First American Real Estate Sentiment Index

Continued positive economic news and confidence that buyers will remain undeterred, even if rates exceed 5.5 percent, bode well for the real estate market in 2018, says Chief Economist Mark Fleming


June 12, 2018, 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 second quarter of 2018. 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. 

Chief Economist Analysis: Rising Rates and the First-Time Home Buyer

“Given the strong likelihood of rising mortgage rates in 2018, many savvy real estate market observers are curious how rising rates may impact demand, especially among millennial first-time home buyers,” said Mark Fleming, chief economist at First American. “As part of our quarterly RESI, we recently surveyed title insurance agents and real estate professionals across the nation for their perspective on how sensitive they thought first-time homebuyers were to rising mortgage rates and at what rate they would withdraw from the market.

“According to the title agents and real estate professionals surveyed, nearly 87 percent of first-time home buyers were in the prime home-buying age of 26-35, which corresponds with the millennial generation,” said Fleming.

“On a national level, the title agents and real estate professionals surveyed believe that mortgage rates would need to hit 5.6 percent, 1.0 percentage point above the current rate, before first-time home buyers withdraw from the market,” said Fleming. “We asked the same question in the first quarter of 2017, and title agents and real estate professionals cited 5.4 percent as the mortgage rate at which first-time home buyers would withdraw from the market.

“The increase in the perceived mortgage rate tipping point for first-time home buyer demand indicates that survey respondents may see more runway in the current housing market,” said Fleming. “This may indicate they realize that the housing market is more resilient to mortgage rate increases than they thought a year ago.

“Even though the Fed is widely expected to raise the Federal Funds rate multiple times this year, most forecasts suggest mortgage rates will just reach 5 percent,” said Fleming. “Based on our second quarter RESI results, purchase market demand should not be materially impacted by any modest increase in mortgage rates.” 

The No. 1 Obstacle to Home Buyers: Limited Supply

“However, while rising interest rates may not deter first-time home buyers, lack of inventory might. When asked what the primary obstacle to becoming a homeowner was, 35.3 percent of title agents and real estate professionals responded with limited inventory of homes they like,” said Fleming. “The second most cited obstacle was overall affordability (30.1 percent), followed by down payment (28.3 percent).

“The housing market is facing its greatest supply shortage in 60 years of record keeping, according to the Federal Reserve Bank of Kansas City. The ongoing housing supply shortage will make it difficult for first-time buyers to find a home to buy, even when they are financially ready,” said Fleming.

“Title agents and real estate professionals do not believe increasing mortgage rates will have a significant impact on the housing market in 2018. Continued positive economic news and confidence that buyers will remain undeterred, even if rates exceed 5.5 percent, bode well for the real estate market in 2018,” said Fleming. “However, more than a third of title agents and real estate professionals see limited supply as the primary obstacle to first-time home buyers.” 

Purchase Market Outlook Remains Positive

“Overall, optimism among title agents and real estate professionals decreased this quarter, likely because they indicated refinance transaction volume is expected to fall in the coming year. However, while their outlook fell for purchase transaction volume growth from last quarter, it remains positive,” said Fleming. “Increasing mortgage rates clearly impacted optimism for the refinance market.”

“The title agents and real estate professionals surveyed expect residential house prices to increase by 4.2 percent in the next year. This is up 0.7 percentage points from last quarter, and 0.1 from the previous year,” said Fleming. “The expectation for further price appreciation is not surprising, given the market dynamics at play in the housing market today that are preventing more existing homeowners from selling their homes and potentially alleviating some of the supply shortage.” 

Second Quarter 2018 Real Estate Sentiment Index

  • Overall, confidence in transaction volume growth over the next 12 months decreased 10.18 percent from the first quarter in 2018, and fell 14.3 percent compared with a year ago.

  • Confidence in purchase transaction volume growth over the next 12 months decreased 5.8 percent from last quarter, and fell 8.1 percent compared with a year ago.

  • Confidence in refinance transaction volume growth over the next 12 months decreased by 16.2 percent from last quarter, and fell 22.2 percent year over year.

  • Prices across all property types are expected to increase by 2.5 percent over the next 12 months. 

Second Quarter 2018 RESI: Top 5 States for Residential Transaction Growth Outlook

  • Residential: The five states with the greatest increase in title agent and real estate professional confidence in residential purchase transaction volume growth as compared with a year ago are: New Mexico (+45.5 percent), Arkansas (+34.7 percent), New Hampshire (+27.3 percent), Oklahoma (+25.0 percent) and Alabama (+21.9 percent). 

Second Quarter 2018 RESI: Top 5 States for Residential Price Growth Outlook

  • 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: Nevada (+9.1 percent), Washington (+8.8 percent), Missouri (+6.8 percent), Tennessee (+6.8 percent) and Florida (+6.7 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 September 2018.

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 wealth management services. With total revenue of $5.8 billion in 2017, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2018, First American was named to the Fortune 100 Best Companies to Work For® list for the third consecutive year. More information about the company can be found at www.firstam.com.

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