Q2 2018 Real Estate Sentiment Index

How Sensitive Are First-Time Home Buyers to Rising Rates?

The First American Real Estate Sentiment Index (RESI) showed that in the second quarter of 2018:

  • 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.

Mark Explains the Real Estate Sentiment Index

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"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 Mark Fleming, chief economist at First American. "Increasing mortgage rates clearly impacted optimism for the refinance market."

Transaction Volume Sentiment Highlights

States with the greatest increase in title agent & real estate professional confidence for residential purchase transaction volume growth as compared with a year ago are:

  1. New Mexico (+45.5%)
  2. Arkansas (+34.7%)
  3. New Hampshire (+27.3%)
  4. Oklahoma (+25.0%)
  5. Alabama (+21.9%)
 

Title agent & real estate professional confidence in purchase transaction volume growth as compared to last quarter by property type are:

  1. Residential (+2.3%)
  2. Industrial (+1.3%)
  3. Multi-family (+0.4%)
  4. Retail (-6.1%)
  5. Office (-9.0%)

Title agent & real estate professional confidence in refinance transaction volume growth as compared to last quarter by property type are:

  1. Industrial (-7.3%)
  2. Multi-family (-9.3%)
  3. Retail (-12.0%)
  4. Office (-14.9%)
  5. Residential (-22.3%)

Price Growth Expectation Highlights

States in which title agents & real estate professionals predicted the highest residential price increases in the coming year:

  1. Nevada (+9.1%)
  2. Washington (+8.8%)
  3. Missouri (+6.8%)
  4. Tennessee (+6.8%)
  5. Florida (+6.7%)

Rising Rates and the First-Time Home Buyer

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.

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 percent above the current rate, before first-time home buyers withdraw from the market. 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. 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. Based on our second quarter RESI results, purchase market demand should not be materially impacted by any modest increase in mortgage rates.

Graph: Estimated average age of first-time homebuyers

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. 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.

"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."

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.

Methodology

The First American Real Estate Sentiment Index (RESI) measures title agent sentiment on purchase and refinance transaction volume and price changes across multiple property types, as well as title agent sentiment on current industry issues. The RESI is calculated for each question as the sum of the positive responses minus the sum of the negative responses divided by two and times the total number of responses plus 50, resulting in an index that varies from 0 (all negative sentiment) to 50 (neutral sentiment) to 100 (all positive sentiment). A RESI value above 50 indicates increasingly positive sentiment and a RESI value below 50 indicates increasingly negative sentiment. Aggregated purchase and refinance sentiment indices are created by using a property-type, stock-weighted average of each underlying sentiment index.

The overall national sentiment index is a loan purpose market share-weighted average of the aggregate purchase and refinance sentiment indices. Aggregated national price expectations are property-type, state stock weighted. Results are only reported when a sufficient number of survey responses are available to produce valid results.

About First American

First American Financial Corporation (NYSE: FAF) 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.

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. © 2018 by First American. Information from this page may be used with proper attribution.