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Potential Fed Rate Hike Will Hit First Time Homebuyers Hardest in 2016

rates-riseThe Federal Open Market Committee (FOMC) will convene next week for the last time this year and are expected to sweep the industry with a change to the federal funds rate, something that has not been done since June 2006.

Title agents in the mortgage industry believe that first-time homebuyers will be impacted the most in the next year if interest rates are raised.

First American Financial Corp., showed in its fourth quarter Real Estate Sentiment Index (RESI), which measures sentiments among title agents about homeownership demand, that most title agents believe more first time buyers will purchase homes in the next year. In addition, the index found that these sale transactions will "move up homebuyers."

According to the index, interest rates would need to rise to 5.1 percent to derail primary residential transaction volumes.

fa“Title agents view first-time homebuyers as most impacted by a potential interest rate hike, while remaining optimistic regarding the level of sale transactions for those first-time homebuyers in the next 12 months,” said Mark Fleming, Chief Economist at First American. “Expectations for future homeownership demand remain positive, despite changing market conditions.”

Title agents forecast that residential property price and transaction volume will rise in 2016, but are now displaying stronger signs of decreasing optimism from the last quarter.

First American reported in the fourth quarter RESI that title agents expect property prices to increase by 5.7 percent on average in the next year, down from the 6.7 percent that was predicted in the third quarter.

Sentiment for home price growth fell from 77 in the third quarter to 63 in the fourth quarter, the report stated.

Title agents remained confident about growth in purchase transaction volume in 2016, with the RESI value for residential purchase transactions was the most positive at 73, down from 78 in the third quarter. Conversely, the outlook for refinance transaction volume among title agents is consistently negative.

The RESI report also shows title agent sentiment for reasons surrounding title policy order cancellations, with the most common reason being buyers' inability to get a mortgage. Title order cancellations will be problematic over the next year, causing property valuation issues and acceptance of a new offer.

Title agents indicated that the rate of policy order cancellation will rise slightly over the next year, with the RESI value increasing from 56 to 57 quarter-over-quarter.

First American's Fourth Quarter 2015 RESI Price Expectation Highlights:

  • Residential: The five states with the highest expected residential price changes in the coming year are: District of Columbia (+8.5 percent), New Hampshire (+8.1 percent), Nevada (+8.0 percent), Michigan (+7.9 percent) and Florida (+7.8 percent)

First American's Fourth Quarter 2015 RESI Title Policy Cancellation Reason Highlights:

  • The five states with the highest expectation for an increase in cancellation rates are: New Mexico (75), Washington (71), Arkansas (70), Missouri (36) and Nebraska (68).
  • The five states with the highest expectation for a decrease in cancellation rates are: Kentucky (45), Minnesota (47), Oklahoma (48), Maine (48) and Rhode Island (50).

Click here to view the full report.

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