A.M. Best Says Rising Mortgage Rates Could Stall Title Insurance Market Growth

February 14, 2017

The U.S. title insurance market is facing an uncertain future as higher mortgage rates and the recent short-term rate hike by the Federal Reserve Bank, with further increases expected in 2017, may drive a decline in existing home sales and dampen the market for new home sales, according to an A.M. Best special report.

The Best’s Special Report, “Rising Mortgage Rates Could Dampen Housing Market Potential and Stall Title Insurance Market Growth,” notes that since Election Day in the United States in November 2016, the 30-year fixed-rate mortgage has increased to near its highest level in two years, from approximately 3.55 percent to a high of 4.32 percent at the end of 2016. It remained over 4 percent in early February 2017.

For title insurance providers, the impact of higher mortgage rates on home sales is likely to be one of the market’s key issues in 2017. The report states that if mortgage rates were the only market variable changing, the increase in mortgage rates would have a negative impact on home sales and home prices. However, the U.S. labor market experienced job and wage growth in 2016, and the improved strength of the broader economy could lead to a rise in incomes that may offset rising mortgage rates, enabling the housing market to remain relatively smooth in terms of sales volume.

Direct premiums written by title insurers generally have been increasing, totaling $3.7 billion in third-quarter 2016, compared with $3.4 billion in the same period in 2015, and $2.9 billion in third-quarter 2014. However, the current levels are still well below those reported in 2005 at the peak of the housing cycle.

With the specter of future Fed rate hikes looming, potential homebuyers may push to compete for the limited number of homes currently for sale, rather than taking a chance that mortgage rates could drift higher. A.M. Best said that should more buyers enter the housing market and outnumber the availability of new or existing houses, basic supply and demand economic principles dictate that this would likely result in increased average home prices and declining affordability.

According to the report, most of the housing inventory comes from the existing market and not new construction; therefore, decisions made by potential sellers will have a major impact on the market as a whole, particularly as higher mortgage rates can dissuade existing homeowners from purchasing a new home as their existing mortgage rates potentially could be significantly lower than what they would pay on a new home. This mismatch between rates for old mortgages and new ones could have a material impact on the timing of homes being made available for sale, A.M. Best said in its report.

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