Optimism for Growth in Real Estate Transactions Improves Substantially Over Last Quarter, According to First American Real Estate Sentiment Index
Reduced expectations for mortgage rate increases in 2016 significantly improves independent title agent outlook for transaction volumes, says Chief Economist Mark Fleming
June 21, 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 second quarter of 2016 found that title agent expectations for growth in purchase and refinance transactions across all property types in the year ahead are 17.3 percent more positive than they were during the first quarter of 2016. Quarter over quarter, title agents’ confidence in purchase market growth increased 12.9 percent and 23.2 percent for refinance transactions. In regard to real estate prices, title agents are now predicting 4.0 percent price growth over the next 12 months, which is a slight drop from the first-quarter prediction of 4.6 percent annualized price growth.
The RESI is based on a quarterly survey of independent title agents and measures their sentiment on a variety of key market metrics and industry issues, including expectations for changes in purchase and refinance transaction volume and prices across multiple property types. In 2016, the survey has also tracked title agent sentiment regarding the implementation of the Know-Before-You-Owe rule, also referred to as the TILA-RESPA Integrated Disclosure (TRID) rule. More than 5,000 title agents from 50 states have participated in the first four editions of the quarterly survey. The 2016 second quarter survey was conducted in April 2016.
Title Agent Outlook for Transaction Volume Growth Trends Positive in Second Quarter
“Overall, title agents are significantly more optimistic than last quarter about the volume of both purchase and refinance transactions in the year ahead,” said Mark Fleming, chief economist at First American.
“For purchase transactions, title agents expressed broad-based confidence about the growth in volume across all property types over the next year. Nationally, expectations for residential purchase transactions were the most bullish, increasing 12.9 percent from the first quarter,” said Fleming. “Among the mix of commercial property types, title agents were most positive regarding increases in office property transaction volume, a change from the previous quarter, when their outlook for growth in industrial property volume was the most positive.
“The outlook for refinance transaction volume among title agents is modestly positive, but much less so than for purchase volume,” said Fleming. “However, this modestly bullish outlook is a significant change from the previous quarter, when title agents said they expected refinance volume to go down, possibly due to a reduced expectation of higher mortgage interest rates in the coming year.”
Title Agent Optimism for Overall Market Price Growth Cools Slightly, but Strengthens for Residential Properties
The second-quarter RESI showed that title agents predict price growth across all property types to rise by 4.0 percent in the coming year, a decrease from the 4.6 percent prediction cited in the first quarter.
“While expectations for price growth across all property types is cooling, the 2016 second-quarter RESI found that title agents feel more confident about residential property price growth than they did in the first quarter, with that confidence increasing 18.1 percent. The increased expectation for price growth is likely driven by the spring’s shortage of inventory and continued low mortgage rates,” said Fleming. “State by state, title agents remained strongly positive regarding residential price increases, with the exception of agents in New Mexico who expect declining prices.
“Agents were similarly confident in their expectations for multi-family property price increases over the next year, with the exception of title agents in Mississippi. Title agent expectations varied more by state for other commercial property types (retail, office, and industrial),” said Fleming.
2nd Quarter 2016 RESI Price Prediction Highlights
- Residential: The five states with the highest predictions for residential price increases in the coming year are: Tennessee (+9.8 percent), Kentucky (+8.8 percent), Idaho (+8.7 percent), Wisconsin (+8.5 percent), and Utah (+8.0 percent).
- Multi-Family: The five states with the highest predictions for multi-family price increases in the coming year are: Kentucky (+8.3 percent), Rhode Island (+7.8 percent), Florida (+7.2 percent), Idaho (+7.0 percent), and Tennessee (+6.3 percent).
“Market Production,” a Leading Indicator, Increases in the Second Quarter
Title agent expectations for market production, a potential leading indicator of real estate market direction, increased 2.5 percent from the first quarter of 2016.
“Market production is a metric that combines title agent expectations for transaction volumes and price changes over the coming year,” said Fleming. “Increased confidence in the growth of purchase and refinance volume in the second quarter helped to offset expectations that price increases will cool to a 4.0 percent growth level.”
Title Agents’ Expectations for Closing Delays Due to Know-Before-You-Owe Lessens, While They Believe Consumers’ Understanding of the Closing Process is Improving
“Title agents are less likely to believe that Know-Before-You-Owe will cause closing delays during the spring home-buying season than they were in the first quarter. Title agents still believe that Know-Before-You-Owe will cause delays, but that feeling has decreased by nearly 20 percent since the first quarter, which indicates the marketplace is adapting to the new process and forms,” said Fleming.
“Title agents continue to report that their cost of closing a loan has increased, citing an average increase of $184 per transaction in the second quarter. However, they also note that the increases are not necessarily due to Know-Before-You-Owe directly, but a result of the varied approaches to rule implementation taken by lending institutions. These variances, they say, are forcing title agents to create different closing procedures for each lender with which they work, contributing to increased costs for title agents,” said Fleming. “The increase in cost per transaction due to this differs dramatically by geography. Title agents in New Mexico indicated the highest increase, at $313, while title agents in Indiana indicated the lowest increase at $58.
“The independent title agents surveyed feel that consumer understanding of the closing process is gradually improving,” said Fleming. “While sentiment regarding this remains negative, there was a 74.7 percent improvement over the past quarter in how well title agents believe consumers’ understanding of the closing has improved due to Know-Before-You-Owe,” said Fleming.
“Change is difficult, and the implementation of the new Know-Before-You-Owe processes and forms was a challenge for title agents as well as lenders, requiring significant investments in new technology and time,” said Fleming. “Based on our survey, title agents’ belief that the new rules are benefiting consumers is improving and that closing delays are declining. We are all getting used to the new normal.”
The next release of the First American Real Estate Sentiment Index will be posted in September 2016.
The methodology statement for the First American Real Estate Sentiment Index is available at http://www.firstam.com/economics/real-estate-sentiment-index.
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.