Q1 2018 Real Estate Sentiment Index

Will the Tax Code Changes Influence House Prices or Housing Market Supply and Demand?

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

  • Overall, confidence for transaction volume growth over the next 12 months increased 0.2 percent from Q4 2017 and increased 4.1 percent compared with a year ago.
  • Confidence for growth in purchase transaction volume over the next 12 months decreased 6.2 percent from last quarter, but was up 0.2 percent compared with a year ago.
  • Confidence in refinance transaction volume growth over the next 12 months decreased by 7.8 percent from last quarter and increased 9.9 percent compared with a year ago.
  • Prices across all property types are expected to increase by 0.3 percentage points over the next 12 months as compared to last quarter.

Mark Explains the Real Estate Sentiment Index

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"Overall, optimism among title insurance agents and real estate professionals decreased slightly this quarter, likely because they indicated refinance transaction volume is expected to fall in the coming year. However, optimism for growth in purchase transaction volume increased compared with a year ago," said Mark Fleming, chief economist at First American. "Increasing mortgage rates clearly impacted optimism for the refinance market, but despite this, optimism remains strong for increased purchase demand."

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. Kentucky (+50.0%)
  2. West Virginia (+40.0%)
  3. Maryland (+31.3%)
  4. Arizona (+27.4%)
  5. Texas (+24.3%)

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

  1. Utah (+73.3%)
  2. Arkansas (+35.0%)
  3. Montana (+33.8%)
  4. Kentucky (+30.0%)
  5. Oklahoma (+28.3%)

Price Growth Expectation Highlights

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

  1. Washington (+6.8%)
  2. Colorado (+6.6%)
  3. Oklahoma (+6.3%)
  4. Idaho (+5.5%)
  5. Montana (+5.4%)

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

  1. Missouri (+7.1%)
  2. Tennessee (+6.7%)
  3. Washington (+5.6%)
  4. Montana (+4.6%)
  5. Colorado (+4.4%)

New Tax Code Impacts

The impact of the new tax code on the housing market has been heavily studied and debated in academic, policy and political circles, with most agreeing that the changes remove any significant tax differences between homeowners and renters for the majority of U.S. households. But, what do the people handling real estate transactions every day think? As part of our quarterly 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 new tax code may impact house prices, housing supply (the willingness of homeowners to sell) and housing demand.

Price Appreciation Impact

Title agents and real estate professionals slightly leaned toward the opinion that the new tax code would not negatively impact house appreciation, but responses were split relatively equally. Of the respondents, 27 percent believe that the tax code could negatively impact house price appreciation, 35 percent believe it will not do so, 35 percent were neutral on the topic.

This split opinion may be due to the fact that expensive markets with higher priced homes are more likely to be impacted by the new tax law because of the limit on the deductibility of state and local property taxes. Indeed, survey respondents in areas with high housing costs, such as Washington D.C., California and New York, were more likely than others to agree that the new tax code would negatively impact house price appreciation.

Housing Supply Impact

Title agents and real estate professionals were also asked if the new tax law changes may hinder the supply of housing by reducing the willingness of homeowners to sell. The good news for the housing market is 46 percent, almost half of all respondents, did not believe the new tax code will significantly reduce existing homeowners' willingness to sell. Another 37 percent of respondents thought there would be no impact at all. In fact, only 17 percent of respondents thought that the tax code would significantly reduce homeowners' willingness to sell.

Housing Demand Impact

We also asked title agents and real estate professionals about the tax code's potential impact on home buyer demand. More than 75 percent of survey respondents indicated that the tax code changes would not significantly reduce demand (45 percent) or would have no impact on demand at all (32 percent). Only 23 percent of title agents and real estate professionals surveyed believed that the tax code changes will reduce demand.

Bottom Line: Tax Code Expected to Have Little Impact on Overall Housing Market

When it comes to the new tax code, title agents and real estate professionals – the folks that spend their days closing real estate transactions – do not believe that the new tax code will have a meaningful, negative impact on the housing market. In general, you could argue that title agents and real estate professionals surveyed believe the tax code does not meaningfully drive housing prices, supply or demand. Title agents and real estate professionals know that, when it comes to buying and selling a home, consumers consider more than just the tax consequences of homeownership.

Chart: Does the Tax Code Influence the Housing Market?

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.