Market Overview

Housing Market Can Overcome Rising Interest Rates, According to First American Potential Home Sales Model

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—Given today's strong economy, our housing market is well
positioned to adapt to rising mortgage rates, says Chief Economist Mark
Fleming—

First
American Financial Corporation
(NYSE:FAF), a
leading global provider of title insurance, settlement services and risk
solutions for real estate transactions, today released First American's
proprietary Potential
Home Sales Model
for the month of February 2018.

Chief Economist Analysis: How High is Too High for Mortgage Rates?

"The Federal Open Market Committee (FOMC) meeting is just around the
corner, and experts
agree
that an increase in the Federal Funds Rate is almost certain.
In fact, the expectation of future Fed rate hikes is already putting
upward pressure on mortgage rates. The benchmark 30-year,
fixed-rate mortgage rate jumped three basis points to 4.4 percent this
past week. Since the start of the year, the benchmark rate has climbed
almost half a percentage point and has increased for eight consecutive
weeks," said Mark Fleming, chief economist at First American. "Concern
is growing about the impact of the rising mortgage rates on the housing
market, but it is important to keep today's mortgage-rate environment in
perspective.

"Let's transport ourselves back to the early 1980s. In 1981, a
prospective home buyer walking into a bank would have been offered a new
30-year, fixed-rate mortgage at a staggering 18 percent interest rate.
Just four years earlier in 1977, that same bank would have offered the
same mortgage for 8 percent," said Fleming. "The four years between 1977
and 1981 witnessed the most dramatic increase in mortgage interest rates
in the last 50 years. At its most extreme point in 1980, mortgage rates
experienced a 50 percent year-over-year increase. The historically
unprecedented increase had a devastating effect on the housing market –
single-family home sales declined by 36 percent between 1979 and 1981."

What if Interest Rates Doubled?

"Considering this historical context – is the housing market today as
sensitive to mortgage rate increases as it was 40 years ago? How would a
significant increase in the 30-year, fixed-rate mortgage rate impact the
housing market today," said Fleming.

"Fortunately, the answer is not as dramatic as many may think. In fact,
using our Potential Home Sales model, we doubled the mortgage rate from
its current value of about 4.4 percent to approximately 9 percent and
the market potential for home sales declined from the current value of
6.1 million SAAR to 5.8 million SAAR," said Fleming. "So, if mortgage
rates doubled overnight, our model indicates a decline of just 300,000
sales, a mere 5 percent decrease.

"Let's be clear. Mortgage rates increasing to nearly 9 percent is
extremely unlikely. There is no expectation of a mortgage rate increase
of this magnitude. However, this scenario helps to put modest mortgage
rate increases into perspective – they are unlikely to materially impact
the housing market.

"As we have previously
discussed
, economic conditions are favorable to consumers and
helping increase consumer borrowing power. However, the healthy economic
growth and strong labor market are increasing the risk of rising
inflation, and rising inflation may spur the Fed to raise rates faster
than currently expected. Yet, given today's strong economy, our housing
market is well positioned to adapt to rising mortgage rates," said
Fleming.

What Insight Does the Potential Home Sales Model Reveal?

"When considering the right time to buy or sell a home, an important
factor in the decision should be the market's overall health, which is
largely a function of supply and demand. Knowing how close the market is
to a healthy level of activity can help consumers determine if it is a
good time to buy or sell, and what might happen to the market in the
future. That's difficult to assess when looking at the number of homes
sold at a particular point in time without understanding the health of
the market at that time," said Fleming. "Historical context is
critically important. Our potential home sales model measures what home
sales should be based on the economic, demographic, and housing market
environments."

Next Release

The next Potential Home Sales Model will be released on April 20, 2018
with March 2018 data.

About the Potential Home Sales Model

Background information on the First American Potential Home Sales Model
is available here.

Disclaimer

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.

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 wealth management services. 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.

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