Expectations for Real Estate Market Transactions Weaken in the First Quarter, According to First American Real Estate Sentiment Index

The modest decline in title agent expectations for market production was caused by concerns over transaction volume as opposed to slowing price appreciation, says Chief Economist Mark Fleming


March 22, 2016, 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 announced that the First American Real Estate Sentiment Index (RESI) for the first quarter of 2016 decreased 4.4 percent from the fourth quarter of 2015. Quarter over quarter, purchase market sentiment declined 4.2 percent and refinance mortgage sentiment declined 4.9 percent.

The RESI is compiled based on a quarterly survey of independent title agents that do business with First American and 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. More than 4,000 title agents from 50 states have participated in the first three editions of the quarterly survey. The 2016 first quarter survey was conducted in January 2016.

Independent Title Professional Expectations for Real Estate Market Transactions Weaken in the First Quarter of 2016

Title agent expectations in the year ahead for purchase and refinance transactions across all property types declined this quarter as the overall sentiment index decreased 4.4 percent from the fourth quarter of 2015. Quarter over quarter, purchase market sentiment across all property types declined 4.2 percent and refinance mortgage sentiment across all property types declined 4.9 percent.

Expectations of market production, a potential leading indicator for real estate market direction, declined 1.8 percent from the last quarter of 2015. Market production combines title agent expectations for transaction volumes and price changes over the coming year into one metric. While the overall expectation for price growth increased to 4.6 percent across all property types, expectations for production volume declined for purchase and refinance transactions.

“The modest decline in title agent expectations for market production was caused by concerns over transaction volume as opposed to slowing price appreciation,” said Mark Fleming, chief economist at First American. “Rather, concerns about rising prices hampering affordability and access to credit are tempering title agent expectations for market growth.”

Title Agent Optimism Rises Nationally for Residential Property Price and Transaction Volume Growth in 2016

Sentiment among title agents for residential property price growth increased the most, from 63 in the previous quarter, to 66 in the first quarter. A RESI sentiment value above 50 (neutral) indicates increasing positive sentiment and a sentiment value below 50 indicates increasing negative sentiment. Title agent sentiment at a state-by-state level for residential price increases remained mostly positive, with only North Dakota, West Virginia, and New Mexico indicating a drop in prices. Nationally, title agents indicated that they expect residential property prices to increase by 5.6 percent over the next year, which is down slightly from the 5.7 percent that they indicated the previous quarter, and down from the 6.7 percent that they indicated in the third quarter of 2015. For multi-family properties, sentiment among title agents was similarly positive for price increases over the next year, with the exception of West Virginia and North Dakota. Sentiment varied more so by state for commercial property types (retail, office, and industrial).

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 national RESI value for residential purchase transactions was the most positive at 74, up from 72 in the fourth quarter. Among commercial property types, sentiment regarding increases in industrial properties was the most positive, a change from the previous quarter, when office property types took the lead. Conversely, the outlook for refinance transaction volume among title agents is consistently negative.

Leading Cause of Title Order Cancellations for Next Year Remain Unchanged

The 2016 first 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 unresolved title issues and a higher purchase offer being received. 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 fourth 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 fell from the fourth quarter, with the RESI value moving from 57 to 55.

1st Quarter 2016 RESI Price Expectation Highlights

  • Residential: The five states with the highest expected residential price changes in the coming year are: New York (+10.4 percent), Kentucky (+9.8 percent), North Carolina (+8.5 percent), Michigan (+7.7 percent) and Minnesota (+7.7 percent).
  • Multi-Family: The five states with the highest expected multi-family price changes in the coming year are: New York (+10.8 percent), Delaware (+10.0 percent), South Carolina (+9.9 percent), Texas (+9.9 percent) and Pennsylvania (+8.2 percent).

1st Quarter 2016 RESI Title Policy Cancellation Reason Highlights

  • The five states with the highest expectation for an increase in cancellation rates are: New Jersey (71), Arkansas (70), New Mexico (67), Utah (66) and California (63).
  • The five states with the highest expectation for a decrease in cancellation rates are: West Virginia (40), Indiana (44), Arizona (44), Mississippi (47) and Idaho (47).

Next Release

The next release of the First American Real Estate Sentiment Index will be posted in June 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. © 2016 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 $5.2 billion in 2015, 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.

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