Big Four executives bemoan housing market conditions

Stewart and First American reported their first quarter 2023 earnings Thursday morning

Executives at both Stewart Information Services and First American Financial bemoaned the challenging housing market environment as they discussed their respective firms’ first quarter 2023 earnings with investors Thursday morning.

“The sharp decline in affordability driven by mortgage rates above 6%, along with low inventory and elevated home prices, adversely impacted the housing market, and as a result, our residential purchase business,” Ken DeGiorgio, the CEO of First American, told investors Thursday morning.

For DeGiorgio’s firm, these conditions resulted in a total revenue of $1.4 billion for the quarter, down 29% year over year, and a $45.9 million net income, down from $97.9 million a year prior.

The firm’s title segment also recorded drops in revenue and income during the first quarter of the year, with revenue posting a 32% annual decline to $1.3 billion, and pre-tax income coming in at $88.2 million compared to $219.5 million the same quarter a year prior.

Executives attribute the declines to slower title order volume, with the number of title orders opened in the quarter dropping from 279,000 in Q1 2022 to 172,600 in Q1 2023. The commercial segment recorded just 25,600 opened orders for the quarter, a 28% annual decrease.

However, these declines were partially offset by a 15% year-over-year increase to $3,428 in average revenue per direct title order closed in the quarter. This was due to a shift in the mix to higher premium commercial transactions from lower premium refinance transactions compared to a year ago.

In Q1 2022, First American recorded a refinance order volume of 1,061 refinance orders opened per day compared to 349 refinance orders opened per day in the same quarter this year. According to DeGiorgio, mortgage rates would have to drop well below 5.0% to trigger another major refinance wave.

Despite his firm’s struggles, DeGiorgio has found reasons for optimism, including the launch of Endpoint’s mobile notary platform and developments on the instant title front.

“During the last few quarters, we have discussed our initiative to develop instant title decisioning for purchase transactions, which also promises to improve our operational efficiency and expand our competitive advantage,” DeGiorgio said. “Given the success of our early testing, we expect to deploy it in two markets within the next year.”

However, along with ServiceMac, Endpoint and the instant title initiative resulted in an $18 million pretax loss in Q1 2023. While this is not great news during the challenging housing market, the firm said it expects these innovation initiatives to positively contribute to its profitability in the long term.

In addition, DeGiorgio had promising news about the start of the second quarter.

“The purchase market appears to have stabilized,” he said. “In the first three weeks of April, we are seeing typical seasonal improvement in the purchase order trend, with open orders up over 5% compared with March.”

Like First American, other Big Four member Stewart also recorded weaker financial results in the first quarter of 2023 compared to the first quarter of 2022.

During the first quarter of 2023, Stewart reports a total revenue of $542.3 million, down from $852.9 million a year ago, and a net loss of $8.2 million compared to a net income of $57.9 million in Q1 2022.

The firm’s title segment also reported weaker financial results, recording a 37% annual decrease in revenue to $456.9 million and a pretax net loss of $700,000, compared to a pretax net income of $82.8 million a year ago.

The weaker title segment results were attributed to the large decrease in orders opened in Q1 2023 (73,861 orders opened) compared to Q1 2022 (116,755 orders opened). However, Stewart did record a 30% annual increase to $3,400 in its average domestic residential fee per file, which the firm attributed to a higher purchase mix.

“These challenging market dynamics, along with the impact of seasonality, led us to our lowest quarter closed order volumes in over 20 years,” Fred Eppinger, Stewart’s CEO, said Thursday morning. “We expect this difficult environment will moderately improve in the second quarter, but the challenging environment will continue to the second half of 2023, and we will continue to be an adjustable business with a careful balance of cost disciple and investments in skill and capabilities that we will expect to put us in the best position long-term.”

But like DeGiorgio, Eppinger remained positive about the future outlook for his firm, despite the weaker quarter.

“What is interesting for us is that I think closed orders were down 50% in January, 48% in February and 40% in March,” Eppinger said. “We made money in March. I think we are a much better company now.”

Executives also reminded investors and analysts that Stewart failed to turn a profit in the first quarter of the year for over 100 years, and that it wasn’t until three years ago that the firm reported its first Q1 net income.

“We will both manage our expenses and investments with a practical balance between an operating discipline for the current short-term market challenges and strengthening Stewart for the longer term growth performance,” Eppinger said.

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