First American Financial Corporation (NYSE: FAF) today released First American’s proprietary Real Estate Sentiment Index (RESI) for the second quarter of 2019. The RESI is based on a bi-annual 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: Lower Rates Spurring Demand, But Affordability Remains a Leading Obstacle
“In late 2018, many experts believed the housing market in 2019 would behave very similar to the 2018 housing market, characterized by rising demand for homes and limited supply driving house price appreciation, while mortgage rates continued their steady ascent,” said Mark Fleming, chief economist at First American. “Then, December 2018 brought a sudden drop in mortgage rates, a decline which has persisted into the first half of 2019. As part of our bi-annual First American Real Estate Sentiment Index (RESI), we recently surveyed title insurance agents and real estate professionals across the nation for their perspective on how the unexpectedly low mortgage rates have impacted home buyers and sellers in their market.
“According to 57 percent of title agents and real estate professionals surveyed, the unexpectedly low mortgage rates of 2019 have increased home buyer demand in their market. In fact, only 15 percent disagreed with this sentiment,” said Fleming. “However, despite lower mortgage rates boosting affordability and stimulating demand, 40 percent of survey respondents indicated that affordability is the primary obstacle to becoming a homeowner – this is not surprising as house prices nationally continue to grow, albeit at a slower pace in 2019. The next highest-rated obstacles to becoming a homeowner were the limited inventory of homes they like (30 percent) and down payment (22 percent).
“Affordability has overtaken the lack of supply as the primary obstacle to homeownership, according to a year-over-year review of survey results,” said Fleming. “When we asked this question a year ago, survey respondents (35.3 percent) slightly favored the limited inventory of homes as the primary obstacle over overall affordability (30.1 percent). Down payment (28 percent) followed closely behind in the second-quarter 2018 survey.
“Title agents and real estate professionals no longer view limited inventory as the primary obstacle to becoming a homeowner,” said Fleming. “The main burden, affordability, confirms the strong sellers’ market conditions from 2018 have continued in many markets in early 2019, as demand outpaces supply and prices continue to rise.”
Is Improving Supply Helping Homeowners Escape the Prisoner’s Dilemma?
“Throughout 2017 and 2018, homeowners faced a ‘prisoner’s dilemma,’ a situation where many homeowners were ‘imprisoned’ in their current home by the fear of not finding a home to buy and the fear of losing their historically low mortgage rate,” said Fleming. “According to our survey of title insurance and real estate professionals, homeowners may finally be on the verge of escaping the ‘prisoner’s dilemma.’
“Not only have concerns over limited supply eased as an obstacle to homeownership, homeowners appear to be more willing to list their homes for sale because they are more confident in finding a home to buy, according to our survey of title insurance and real estate professionals,” said Fleming. “When asked what had the greatest influence on the decision by homeowners to list their homes for sale this spring, most title agents and real estate professionals (37 percent) indicated the supply of alternative homes at the desired price point has increased.
“Survey respondents also cited that the rate for a new mortgage is competitive with existing mortgage rates (32 percent), creating another crack in the prisoner’s dilemma for homeowners. In the first quarter of 2019, mortgage rates fell to 4.37 percent. While still higher than one year ago, that is a significant decline from the fourth quarter 2018 rates of 4.78 percent,” said Fleming. “Mortgage rates have fallen even further during the second quarter of 2019. As the spread between homeowners’ existing rates and new mortgage rates narrows, the less ‘rate-locked’ homeowners are.
“However, even though there are some signs that homeowners are more willing to list their homes for sale, supply constraints remain the biggest concern for homeowners by a wide margin, according to our survey findings,” said Fleming. “When asked what was the greatest influence on the decision by homeowners to not list their homes for sale this spring, the biggest reason was the fear of not being able to find a home to buy (69 percent).
“Feeling less ‘rate-locked’ has encouraged more homeowners to sell, but many still fear not being able to find something better to buy. To sell, or not to sell. This is the dilemma that existing homeowners face,” said Fleming.
Millennials Dominate the First-Time Home Buyer Market
“The millennial generation, those between the ages of 23 to 38, have been the primary drivers of homeownership growth since 2018. Title agents and real estate professionals surveyed confirmed this data, with 87 percent of respondents indicating first-time home buyers were in the prime home-buying age of 26-35,” said Fleming. “This is consistent with our survey findings from the spring of 2018, indicating millennials remain the primary source of first-time home buyers in 2019. Indeed, we expect millennials to continue driving the housing market for the foreseeable future.”
Purchase and Refinance Market Outlook Improve
“Title agents and real estate professionals had a positive outlook for the overall purchase market in the second quarter of 2019, likely due to declining mortgage rates and a strong labor market,” said Fleming. “As might be anticipated, unexpectedly lower mortgage rates boosted the outlook for growth in refinance transactions compared with one year ago.
“Title agents and real estate professionals are more optimistic about price appreciation growth now than they were at the end of 2018, but slightly less optimistic than a year ago. Survey respondents expect residential house prices to increase by 3.8 percent in the next year,” said Fleming. “The outlook for price appreciation is up 1.7 percentage points from the fourth quarter of 2018, and down 0.4 percentage points from the previous year.
“Changes to house prices in part reflect the relationship between supply and demand. As demand increases relative to supply, price appreciation increases,” said Fleming. “Slower house price appreciation and declining mortgage rates in 2019 have increased affordability and boosted demand. Housing supply, however, has been slower to respond. Increased demand and limited supply will likely result in faster house price appreciation again in 2019.”
Second Quarter 2019 Real Estate Sentiment Index
- Overall, confidence in residential purchase volume growth over the next 12 months decreased 5.0 percent compared with a year ago.
- Confidence in refinance transaction volume growth over the next 12 months increased 72.5 percent compared with a year ago.
- Residential property prices are expected to increase by 3.8 percent over the next 12 months
- Residential price expectations are 0.4 percent lower than they were one year ago.
“Overall, optimism among title agents and real estate professionals increased this quarter compared to the fourth quarter of 2018, likely due to declining mortgage rates and the slowdown in house price appreciation,” said Fleming. “In fact, the unexpectedly low mortgage rates fueled the largest yearly growth in refinance sentiment since the inception of the survey.”
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 bi-annual 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.