All right, I think we're going to go ahead and get started here. But thanks for joining us. We're still on, obviously, day one here. This is our second meeting at the Stephens Investment Conference. We're here in Nashville live. We've done this the last couple of years. So super excited about hosting First American here. That's ticker FAF. The nation's number two title insurer. The company has a really, I think, underappreciated offering as far as outside of core title. You've got, obviously, you know, kind of outsized exposure, investment income. You've got a really good data business. You've got home warranty. You've got a couple of other areas of the business I think are pretty interesting. I think Mark is going to talk to that in a second. But on the stage representing First American is CFO Mark Seaton and IR Craig Barberio.
For those who don't know, I'm the analyst, John Campbell. I cover real estate services here for Stephens. But happy to have these guys on the stage. We'll go through some back and forth Q&A, and then we're going to open up to the audience if you guys have any questions. But with that, thanks for joining us, guys. If maybe we can start off, and this is kind of a tradition for us, we typically poll all of our real estate-related companies on some of these kind of high-level macro questions. I'm just kind of compare and contrast what you guys are thinking out there. But maybe, Mark, if you want to start off with, for the next year, kind of what you think about U.S. housing, whether you think that's going to be up sharply, modestly unchanged, down modestly, or down sharply.
That's just a quick answer for me here, John.
Yeah.
Before I give that quick answer, I just want to thank you for hosting us here. We've had a long relationship with Stephens for a long time. It's good to be here, but our view is it'll be up modestly next year.
Yeah. And let me back up a second because I think you were going to do a little bit of an intro. So I'm sorry I jumped right into the questions. Go ahead. Why don't you frame up the business for us a little bit, and then I'll get into these questions.
Okay. Well, yeah, thanks for being here, and thanks for taking an interest in First American. Just a minute or two here. So we're a national title insurance and settlement services company. You want to buy a house, you want to refinance your house, you want to buy a commercial property, you're going to need someone like First American to help you with that. And in terms of the market, I mean, it's a tough time in our business now. I mean, ever since mid-2022 when origination volumes fell, I mean, it's been very, very, very tough in our business. The good news is, you know, we think we're in the first pitch of the first inning of a recovery here. And there's really a few key drivers to our business, and I'm sure we'll get into these later.
But we've got our commercial business, we've got our refinance business, and we have our purchase business. And we feel like they're all going to grow next year. And there's debates about, you know, how well they're going to grow. But we feel like we're going to have growth next year. We also feel like our investment income is going to grow. We did a big tax loss harvesting project, which we might get into as well. But our earnings, everything else being equal on that, are going to go up about $70 million next year. And we've been really focused the last two years on innovation and making our business more productive. At the end of the day, we issue a product called a title policy, and we perform a service called a closing or an escrow. And both of those have been very manually intensive in the past.
And we've invested a lot in the last five years to improve our productivity. And we've built some gems, and we're in the early stages of rolling those out nationally. And so we feel like, you know, certainly next year, the market will be better. But over the next, you know, couple of years, not only will we get benefits from just the improvement in the markets, but we're going to have higher productivity improvement over time. And just from a strategic perspective, I'd say we're just all in on title and escrow. Like, we're not going to get into businesses that have no synergistic value with us. We're not exactly a pure play because we've got a data business, we have a bank, we've got a home warranty company, we do other things than just title and escrow.
But all those other businesses that we're in have really tight synergies with our core title business. And I'm sure we'll get into some of those issues, John.
Yeah, for sure. All right. So after my five-yard penalty false start, we'll go back into the polling questions on the macro. So you gave us an answer on the U.S. housing. And just to frame this up, and to be fair, if we look at the Fannie Mae, Freddie Mac, NBA, NAR estimates the last couple of years, like, it's like weatherman, right? And it's been tough, right? So just to frame it up, this is really hard to call, especially right now. But your views on mortgage rates next year?
May I start with just kind of the range out there? You know, we typically look at our orders. That's what we live and die by. And we adjust accordingly. But I mean, Fannie's sitting at 5.7% for 30-year mortgage rates next year on average. NBA's at 5.8%. Other forecasters are as high as 6.1%. Most folks have the ending rate just below 6%. And if you look more recently with the election results, there's a more recent forecast for higher rates still. We don't know. It all depends on what policy comes out. But it feels like the best we're going to see next year is just a shade under 6% by the end of the year. That's what I'm hearing, reading.
What's your take?
My take is we will be about 6% at the end of the year.
Yeah.
Yeah. I think the new administration is serious about tariffs, and I think inflation's going to stay higher for longer.
My personal view.
Yeah.
Not the house. I mean, we were talking about this last session, but, you know, Trump said he's made an initiative to get to 3% rates. So we'll see how that happens. It'd be fantastic. It'd be a boon for your business if that's the case. So I guess optional at this point. What about home prices?
Seems like they've just been moderating for a while. I think there was some view that they might have actually come down these last couple of years, just given, you know, some of the challenges we've had economically. But we just haven't seen that. We haven't seen that just because there's just not much supply. And those supply issues that we've had, even though they've gotten a little bit better, they continue to persist. So, I mean, our house view is that we'll just have moderate increase in housing prices, like low single digits next year, which is kind of where we've been.
Yeah.
We don't see any big change there.
Yeah. And that feels, you know, more supply and demand than anything else. But for those who are kind of newer to the space, how closely correlated, how much is home price appreciation reflected in your revenue per order for purchase?
So the rule of thumb is, you know, if housing prices went up, you know, 10%, let's say, over a period of time, our fee profile on the purchase side would go up about 6%. About 60% falls to the fee profile line. So we have this sort of natural price increase built into our product when housing prices rise.
Yeah. And then on refi, you're getting less revenue per order. But what should investors be looking at that will help guide views on revenue per order for a refi?
I would say with refis, it's more about, you know, our pricing is a function of the amount of the mortgage, right? So when you look over a long period of time, we haven't seen that fee profile increase on the refi side that we have on the purchase side. I mean, several years ago, our average fee profile on purchase was about double what it is on refi. Today, it's more than two and a half times on refi. And so we don't get that same leverage. And a part of it is because, you know, we have different channels of our business, and some are more price sensitive than others. The refi channel, I'd say, is probably the most price sensitive. And the purchase channel is one of the least price sensitive that we have.
So those numbers pulled out to be $3,500 on average for a purchase and $1,200 for a refi. And that, like Mark said, the refi is pretty stable. I think you went back six, seven years ago, they might have been closer to $1,000.
Yeah. Makes sense. Okay. So, you know, I always hate asking any kind of question that has the word politics in it or politics. So I'm going to duck and ask this question. But taking feelings aside, how do you think the change or the shift in the political environment is going to impact housing? Is it positive, negative, or neutral?
In terms of the impact to housing, first of all, we've been around for 135 years, so we've seen a lot of things. Not me personally. I haven't seen all those cycles, but I've seen a few.
Craig has, right?
Craig's seen maybe one more than me. But you know, regardless of the administration, there would have been pluses and minuses for First American on both counts. So I think with the Trump administration now, you know, what we're dealing with is we're dealing with just less regulations now. And there's good and bad about that for us. I think the, you know, the corporate tax rate is probably going to be better than it otherwise would have been. So those are positives. But there's positives and negatives. And I think for housing, you know, it's just hard to say if there'd be that much of a difference.
Yeah. Understood. What do you characterize as a normalized market? And any rough sense on how long it takes to get there? And you can frame that up any way.
Home sales overall.
Let's start with some numbers, right?
Yeah. That's always a difficult question. You can say, I'm not sure what a normalized market is anymore. But, you know, we're ending this year at about 4 million existing home sales and about 700,000 new homes. So that's 4.7 million . Most projections I've seen are looking for existing to rise to 4.2 million next year. And maybe we get to 800,000 new homes. So we're right around the, you know, 5 million mark. But I'm kind of, in my mind, I'm kind of feeling like 5 million existing homes is more normal. And it's going to take, it's not happening next year.
Yeah. But I think we're two years or three years away from that kind of market. But so I'd say the normalized market's closer to 5 million existing than 4 million.
Yeah. That gets us back to more of a 5% turnover rate in the housing stock. Yeah. That would be a very healthy market. But it's a couple of two years or three years down the road. Doesn't mean in the meantime, we've got tailwinds on a lot of things.
Yeah. Makes sense. I saw a metric the other day. I think it was maybe Redfin. 30 to 1. So renters are now 30 to 1 for every home buyer, right? It's shocking. Because you think about this, you would think that normalized existing home sales should rise with population, but it hasn't, right? We were doing five million decades ago, right? So it's a bit of a peculiar situation right now. But last one on the polling questions that we've been asking. You guys obviously aren't directly involved in the resi brokerage side of the universe. But you do play with residential brokers. You have to keep track of what's going on in the space. From the NAR settlement changes, any high-level view of where you think commission rates go if there's going to be a material impact over the next year or so? Any kind of thoughts there?
They're going to creep down. They're going to creep down over time. The listing agent's going to be a lot more important than the buyer's agent. The buyer's agents are, you know, trying to figure out what they're going to do with all these changes. We have seen, too, consumers are aware of this. They're aware of this. Consumers are asking a lot of buyer's agents, well, you know, how's this going to work? Let's try to negotiate this upfront. So we, you know, I think there's a lot of consumer awareness. We haven't seen any changes in our transactions from what we just, we kind of care about the transaction. We haven't seen that. We have seen that there's more complications with some transactions.
A lot of times now people will try to, you know, renegotiate the splits like at the time of closing, which creates complications when you're trying to close transactions. But over time, yeah, I mean, we, you know, we think that commission rates, they're going to come down. They're going to come down in favor of the listing agent.
Yeah. You often hear that the real estate agent is kind of like the quarterback of the transaction. But I would almost point to you guys as like the escrow officer, like the closing process, right? At least from a technical standpoint, you're finishing it out, right? And so do you have insights on commissions from that point as part of the closing documents?
We do. We do because we're, you know, we're paying out the commissions, right? So we, you know, collect all the funds, and then we pay it out to the sellers and to the buyer's agents and to the seller's agents. And so we see all that, yeah. And we have seen them come down, not dramatically, and it kind of depends on the market, but they have been shifting down, yes.
That doesn't affect your revenue at all?
No.
It's a flat fee for the closing process?
No.
Okay. All right. Staying on the macro theme, current state of U.S. housing, obviously you mentioned it's very challenging. Outside of rates, and it might just be all rates, but like outside of rates, what do you view as the one or two kind of other influencing factors that investors need to be paying attention to?
Just for our name here?
Just for the broader macro U.S. housing environment, like what are the things outside of rates that kind of move the needle?
The big thing for the purchase market, the resale market, people buying and selling homes, there's a couple of factors. We got rates. We just got family formation, too. And there's just a lot of, you know, young people who are, you know, getting married, getting ready to have that first child, that second child. You start to get that family, you're going to need to buy a house, right? Whether the mortgage rate's at 6.5% or 5.5%. So family formation is a big driver. And then also just housing prices, which, you know, rates and prices kind of go into affordability. And so we've got, you know, there's good news and bad news. The bad news is affordability is not great right now. It's gotten better, but it's just not great.
The good news is there's just a lot of millennials that are, you know, at that age where they're going to buy houses. We have tailwinds. We have demographic tailwinds. And at some point, that's going to have to break open.
Yeah. I'm with you there. We've been trying to figure this out for years now, but like sizing up what kind of demand looks like. Like can you put an actual figure on that? Because to your point, you know, if you've got, if you're living in a shoebox in Manhattan with your newlywed wife, you know, and you've got a one-year-old child, you can put that off for a while. But what happens when that child turns three or four and starts becoming mobile? And then you've got another child on the way, right? Life events do push you out. And I would venture to guess that the casual move-up buyer has just been non-existent the last couple of years. And what we're seeing today is probably almost all life events that happen, like the death, diapers, divorce, diplomas, the 5Ds, right? That's kind of happening.
So I'm with you there. All right. So a little bit more near-term rates, obviously, you know, sharply went down in September, I think 70 basis points-80 basis points , something like that. Crept right back up in October. Talk to us about what that, how that influenced demand, what you guys kind of saw in your order count.
I mean, we weren't. I'd say there's been, you know, talk about pent-up demand. I mean, October results were pretty good, relatively speaking. And November so far is continuing that trend. First two weeks in November, the purchase market's up 7%, 6.6%. Now, before you get too excited, although you can't.
I'm done.
This market, you cannot get too excited in the short run. Resale's up 2%, and we're, you know, new home sales are volatile, so they're up, you know, 26%-27%. But that's just, you know, the vagaries of, you know, how communities open and close, so we're up 2% in resale, and that's down 2% sequentially. Overall, though, we're up 7%, and it's up 7% sequentially, too, which is, you know, it's holding up better than you would expect. Looking at the commercial market, we're up 6.8% year-over-year. That's an 11% jump sequentially. These are open orders per day, and then refinance is up 26% year-over-year, down 38% sequentially, so we are seeing it start to tail off, but overall, talk about pent-up demand, it does feel like the residential market, there's people there out there that are coming up with the cash somehow.
I don't know how they do it, but a lot of cash buyers, about one of every three homes sold, is cash, and then commercial, you know, kind of broke out in the third quarter and seems to be continuing.
Yeah. That's great to hear. I mean, because I think you guys directly saw the impact of lower rates in September. You put up really good September numbers. But as rates came back, October was down. I think you guys had mentioned on your earnings call was down 3% year-over-year. And that was the first three weeks of the month. And so I think you closed the month down 1%, which implies that last week.
That was mostly the new home swung back to the positive. Yeah.
You typically see the last week of the month is usually weighted a little bit heavier?
It depends on just the, you know, vagaries of when a community opens or closes. But the closing orders obviously come in very strong at the end of the quarter.
Okay.
Opens are more ratable throughout the quarter.
Seasonally weaker period. I think one Q's probably January, February is the weakest. But seasonally weaker period. So you don't want to, you know, wave the victory flag. And I know it's only a couple of weeks. So it can be volatile. But I think the message for us is it's encouraging at the minimum. As rates have risen again, you're seeing, and granted, there's potentially easier comps, stuff like that. There's a lot of nuanced stuff there. But the fact that it's not down 5% or 10% and you're not breaking the seasonal pattern, right? You're actually doing better than what you typically see, I think is encouraging at the least. So we'll wait and see what the next couple of weeks to months bring. All right.
So on the commercial side, you mentioned that things are better there, that you kind of broke out, I think is what you mentioned in 3Q. As best as you can tell, like if you can break the market across local versus national deals, and national deals, I'm thinking about closing the GM building in Manhattan and the big energy deals and stuff like that that really can move the needle. Like as best you can tell, break those two markets apart and the health of those two markets.
We've seen the national deals come alive here more than the local, probably just in the last four months or so, five months or so. I mean, on commercial, the first six months this year, our revenue was down 2% versus the prior year. And then in Q3, it really shot up. We were up 19%. And commercial's, you know, lumpy and that can happen. But so far in Q4, we're up more than that. So, and it's really driven because of these national deals. So anything that is not kind of, you know, central business district office is, you know, we're seeing transactions, you know, multifamily. We're doing a lot of data center deals, too. I mean, data center's hot. A lot of data center deals because of the AI revolution here. And so as a general statement, our commercial business is doing well.
I wouldn't say it's in the trough. I mean, the last two years it's been in the trough, but now it's doing well, and just the residential is just, it's going to, you know, there's a little bit of a lag there, just like we saw in 2009, 2010.
Yeah.
Commercial, we're happy with what we're seeing, and national's outperforming local.
Okay. And how would you characterize that? Is that mostly like a fee profile, like the lumpiness of orders, or is it overall order count? Is it a little bit of both?
It's the vast majority of it is fee profile. We're just seeing very high quality transactions, and as you know, I mean, it just, we can close a million-dollar premium deal, and that would matter a lot than a $10,000 premium deal, so we're seeing it all in really the fee profile. Now, our order counts in the last couple of months have been increasing, or at least this month they're up, but it's really all about fee profile.
And then I know this can vary wildly across each of the asset classes, but on average, you know, kind of the, I don't know, I'm not going to stack rank all of them, but like kind of the highest impactful area, the highest fee profile area on average versus the lowest, whether it be office or energy or what?
Energy would be the highest just because those are big, complex transactions. You know, the order counts are very low in energy, but the fee profile is very high because you've got, you know, these big, big large transactions. I think the rest, I'd have to look. I don't have the opportunity to tell you, but energy is definitely the biggest.
Very largest deals. It's been pretty well spread amongst our top asset classes. So it's been consistent. It's really hitting in different areas across the asset class.
This is a granular question, so we might have to follow up on this one. Like office, just generally, exposure, like revenue mix in the past, order mix, however you want to frame it up versus just trying to get a sense for how much that's declined over the last, you know, five, ten years?
You know, it's actually declined. It's been about, it's about, best I can tell, it's about 15%, you know, if you look at the actual asset class mix out there. But it's been about 5%-6% of our revenue for the last two years or three years. So it's been a de-emphasized asset class for quite a while now.
Yeah. Makes sense. Is there any area in commercial that you're particularly over-indexed to or overexposed to?
No, no. I mean, the thing about us is we're kind of like an index for the commercial market. You know, we've got 44 commercial offices all in the major, you know, capital market centers in the U.S. And I wouldn't say we're stronger or weaker in anything geographically or by asset class. I mean, if you're going to do a big transaction, I mean, there's really two underwriters you're going to use. And we're one of them. So you pretty much see everything.
All right. Maybe want to come back to some of the regulatory stuff later, but let's get into the title business. So for those who are fairly new to the story, just maybe kind of frame up the competitive landscape, how you guys differ from the other guys, maybe starting off with investment income.
So I would say that we're one of two title companies that have real scale, you know, Fidelity and us are, you know, we're roughly 25% market share. I think they're probably low 30s. And I would say, you know, that's a big difference. Another big difference is these adjacent assets that we have. So we've got more title plant and property record data than anybody in the industry by far. That's a big advantage for us. And as we go more toward data and technology and more toward automation and more toward AI, you can't really benefit from those things unless you have the data. And we've got more data than anybody else. We've got 1,800 title plants, which is the data you need in our business to underwrite a transaction. And, you know, our largest competitor has just a fraction of that.
So the data is a huge advantage and becoming more important every day. Another advantage that we have is we have a bank. We're the only title underwriter that has a bank. And there's a few advantages with this. One is that it makes our escrow operations more efficient. I mean, we're constantly sending wires and opening accounts and closing accounts. And our bank is tightly integrated from a tech perspective. So it's just easier to work with banks at First American than other places just because of those integrations. But the other thing, too, is it's a financial arbitrage. We're able to monetize in various ways all of our escrow deposits. And our competitors are only able to monetize some of those escrow deposits. So because we have the bank, we can monetize all of those. So there's a financial advantage for having it, too.
So we're really a pure play. I mean, our focus is on title and escrow, but we do have some businesses like data and the bank that really help supercharge our title business.
Yeah. All right. So on your exposure short-term rates, maybe talk about duration, what the sensitivity is. I think you guys have talked about kind of rule of thumb, every 25 basis points, you know, rate, you know, cut equates to, I think you said $15 million. So maybe walk through the moving parts there.
So we have some, well, there's a few different things for our escrow deposits that we have at third-party banks. Every time the Fed cuts 25 basis points, they all call us and say, "Guess what? Your rate's now 25 basis points lower," right? They were giving us 25 basis points on the way up, and they're going to give us 25 basis points on the way down. So that has an immediate impact. And we also have, you know, floating rate securities in our bank that we, you know, have in that, not a lot, not as many as we used to, but we still have some. And so those are really the biggest drivers. The third thing I'd say is we just got operating cash. I mean, today, for different reasons, we got over $1 billion of operating cash.
A lot of that is in our bank. So it's not like it's just sitting at the holding company. It's for liquidity purposes at our bank. But the cash balances, the operating cash balances we have, those are very, very sensitive, too. So yeah, every time the Fed cuts, now we feel like we'll lose $15 million a year of annualized investment income.
I've got you guys pegged on a 520, 525 or so of investment income and title. How much of that is tied directly to the bank?
Yeah. So year to date, it's running about 35% of just kind of looking at the gross net investment income that's coming from the bank, the Trust.
Okay. And then you guys also had a rebalancing effort that you announced that drove a pretty substantial kind of uptick and a sustainable, it feels like, investment income. Walk through the effort. Why do that now and the efforts you took and then kind of frame up the financial impact?
It was really a kind of a tax planning strategy that we started to think about. You know, so we have a bank, and our bank is required to invest at least 65% of their assets in mortgages. And we invest in Fannie and Freddie's. I mean, that's what we do. And we have some corporates and some munis, but you know, most of our bank's assets are mortgages. Well, guess what? Rates go up, mortgages go down. And so, and we sort of, from a gap perspective, we mark everything to market. From a regulatory perspective, we don't. And so we thought, you know, hey, let's just do some tax loss harvesting in our bank. The nice thing about our bank, too, as opposed to our insurance company, is that when we take a loss, it's an operating loss.
So you can recognize the loss for tax purposes right away. For the insurance company, it's a capital loss, and you know, you may or may not be able to recognize it depending on different factors. But with the bank, we just said, "Hey, let's realize these $300+ million of losses, and we can get an immediate tax write-off for that." And so we feel like in the next 12 months, we'll save $90 million of cash taxes over the next 12 months. And so as we kind of looked into this, we also thought, "Hey, there's another benefit, too." And that is when we, you know, sell our $2.8 billion of securities, which we did, and we bought $2.8 billion. Our earnings go up $67 million just by the fact that we did that on a GAAP basis. So.
Yeah, I didn't fully appreciate the cash tax savings angle because I think you guys had outlined the $70 million of direct investment income upside, but the $90 million even more impactful. That's pretty interesting. Okay. As far as the other key drivers, maybe I think commercial is a pretty important driver of investment income. Maybe talk about the escrow balances today, what that looks like in the past, and how sensitive that is to overall CRE activity.
So, for commercial, I think it's maybe underappreciated how much exposure we have to commercial, I would say. And really because we've got our commercial business, which I know everybody appreciates, but the escrow deposits that we generate as a company, roughly about 60% of those are commercial related because for refinance transactions, we don't hold a lot of deposits. The cash goes in and out in the same day oftentimes. For a resale or purchase transaction, we'll hold the deposits for 45 days, 50 days. But the balances are so much less, the fee profile is so much less than on the commercial side where, A, you know, the transaction sizes are bigger, but B, a lot of times we can hold these deposits for a long time. I mean, in some cases, we could hold on to them for a year or two, an extreme situation.
So as a result of that, there's not as much velocity on the commercial side. And we can hold these deposits, you know, for a longer period of time.
Makes sense. All right, let's take a step back up. The title business, you guys have talked to kind of a normalized title range of 11%-13%. For those fairly new to the story, maybe frame up kind of the directionally where you're kind of heading this year without obviously giving too much on 4Q, but just kind of directionally maybe year to date where you're heading, typically what 4Q looks like rather than 3Q, and then as you think about next year, assuming, I think you assume or you're expecting maybe that refi's up, purchase's up, commercial's up. So you're going to get hopefully a level of, you know, a certain level of growth. I think it could be pretty good next year. We'll have to see how that ends up shaking out, but if that can get you kind of comfortably in that 11%-13% range.
So I know that's about 15 questions into one. So good luck.
Yeah, yeah. Well, let me talk about margins, and I'll address a lot of those questions here. For the rest of the year, I mean, at the beginning of the year, we said that our margins were going to be similar to what they were in 2023. 2023, I think we were at like 9.9% title margins, excluding realized gains and losses. And so we said we'd be similar to that, and we're going to be similar to that. So we're going to be very close to that, you know. And a lot of it is, you know, a lot of it will come down to like how strong the commercial market is in December. You know, commercial is always seasonally the strongest in December, and you know, we don't exactly know what it's going to be, but commercial volumes are picking up.
We'll be close to where we were last year, just like we said at the beginning of the year. In terms of our normalized margin, I mean, the 11%-13% is a little, that's old and stale. When we talk about like our normalized margin, you know, the peak margin we ever had was 15%. That was in 2021. The trough the last year or two has been, let's just call it 10%. I'm slightly rounding up. If we're 15% in the peak and we're, you know, 10% in the trough, we'll be at 12.5% during a normalized market, you know, average. You take the average 12.5%. Now, the one thing though is, and we've been very public about this, is our margins have had about 100 basis points drag because of these innovation efforts that we've put in recently.
Those things were either going to, they're either going to work, which we were, you know, we feel confident about those. But if they don't, we'll just shut them down. So I think that like you got to add the 100 basis points of drag. That's not going to be in perpetuity. So I think about our normalized margins as like 13.5%. 11%, I mean, we're going to, I don't know, you know, we're putting our plans together next year, but 11% is certainly not a, that's not a normalized margin for us. I'd say it's 13.5% plus or minus. Yeah. So when we talk about margins for next year, we've got tailwinds with commercial. We've got tailwinds with purchase, and there's a debate about, well, how big is that tailwind, but it'll be better than in 2024.
And then we're not expecting a big, you know, pop in refi. Someday we will, but even if we don't, we'll have a little bit of a benefit there. So all of our major markets, purchase, commercial, refi, will be up next year, and that helps us. The second thing that helps us is, again, we're going to have roughly 70 million more of, 67 million is what we disclosed, of investment income next year because it's tax loss harvesting. So that will be a tailwind. And the other tailwind that we have is right now there's an opportunity for us to reduce our technology expenses. And so we're working on that.
The last thing I would say too is next year, you know, as volumes come back, we're not going to have to hire people as much because we're running relatively low in terms of our productivity metrics just because the market is so low. The first, you know, 15%-20% of revenue growth, we won't have to hire. We should expect a better success ratio than we normally would. For all those reasons, I mean, we're looking at margin expansion next year. Then the headwind we have is the Fed. Again, every time the Fed cuts, we're going to lose $15 million of investment income. The tax loss harvesting thing we did, well, you know, that's basically funds four plus Fed cuts.
Yeah. That's a good point. I mean, I think if you look at consensus numbers, obviously anything that like P&L like yours that is going to be very exposed to transactions, right? And to the broader macro, you tend to see out-year consensus numbers all over the board. I think it's the first time, Greg, you've probably seen this yourself, but it's a very tight kind of group right now. And I think people do expect, you know, a degree of recovery overall for revenues, given the credit for the investment income. I don't think there's a lot of credit on commercial, but on the success ratio, I think everybody's kind of managing historical. So it does seem like you've got a little bit of excess capacity right now where you could see maybe it's slightly better. So that's a good way to kind of frame it up. All right.
On the title business, you did talk about success ratio. So maybe just quickly why you established that, how strictly you follow that, and then also from the investment you're making right now in technology, how impactful that's been. I think you said 100 basis points, but maybe just kind of give us a broad sense of success ratio?
It's a metric we came up with a while back, and it's really just for every dollar of net operating revenue that we get. So we take our operating revenue, not investment income, just our operating revenue, and then we subtract out our agent retention expense. So it's really the net revenue dollars that flow to us. For every dollar of net revenue that we get, we want to spend 60 cents on the dollar in terms of our other operating expenses and our personnel expenses. And if we do that, that's success. We're doing a good job of managing our expenses. And the same thing works on the way down. Like if our revenue is falling a dollar like it was in 2022, we want to cut 60 cents on the dollar. And it's kind of a lagging indicator.
Like we kind of look at it at the end of the month or the end of the quarter and say, "Okay, have we done a good job here?" Because we're managing, you know, our operators are managing like an orders per employee basis. Now over time, it's like if you're doing that, if you're managing a 60% success ratio, like you're improving your margins all the time. So at some point, you're going to get capped out, right? But that's kind of how we think about it.
Yeah, makes sense. All right. I want to get maybe one or two more big picture questions, and then we'll turn it over to the audience before you're running out of time here. You mentioned data, how important data is. I think this is a really overlooked angle to this whole industry: the competitive moats that come with title plants, title data, the records you have, the ability to automate those, the ability to create insights off of that. Putting that all together, I think probably one of the more transformational things you guys are working on right now that maybe is one of the most transformational things you've ever done as a company that is not being talked about. With, I feel like, the investment community generally, it's around automated title underwriting on purchase. So I think you guys call it Sequoia.
You've had other competitors out there kind of try to do it. It's mostly on refi. Purchase is a totally different animal. So talk to us about how you bring all that together, how impactful that could be, where you are in the process of piloting it, how real of a potential that is over time.
So there's several companies, underwriters, including us, that have automated title for refinance transactions. That's not special or unique or differentiated. A purchase transaction is a lot more complex, a lot more challenging. The property's changing hands. You've got to deal with CC&Rs. You've got to deal with easements. You've got to deal with things that you don't have to worry about on a refinance transaction. And so we set out maybe two years ago or so to say, "Hey, let's try to do this. Let's try to do it because we have the data. Can we turn it into a product?" And we had to cross some significant data hurdles, but we've crossed them.
The goal, the vision is that for counties where we have title plants, so we've got title plants now in 1,800 counties of the 3,200 counties in the U.S., we want to be able to get 50% hit rates, 50% of the time when we get an order in those counties, we want to be able to have an instant title policy. That was kind of the vision. If we could do that, that's enough to productize it. We're two years into it, we're very confident we can get there. Actually, we feel like the hit rate's going to be higher than 50%. We have it rolled out right now in Maricopa County. It's just as a pilot and in Riverside County.
And we're still testing it, but as we sit here today, we feel like the hit rates are going to be better and the cost to produce this is going to be lower than our initial projections. And so what we're really doing is we're trying to master it. We want to make sure that we get to those 50% hit rates in those counties and kind of make sure that the product works before we start to roll it out, you know, nationally.
Yeah. So I supposed to ask you the 19th question of what it relates to and what's your volume. Let me ask this question. So let's just say this does roll out. Instead of 13.5 being the mean on title, what would a title margin be on an automated underwriting purchase-only product? The question for the audience is what title margins could look like under a fully automated Sequoia, you know, purchase transaction.
I'll answer it this way. So when you think about like our title production costs, like what does it cost to produce today? We have a centralized unit that does 70% of our orders today. And we spend about $50 million on data, and that's not going away. We spend about $100 million on labor. Okay? And that's including our commercial transactions and our purchase transactions. That's everything. So we're really attacking, you know, that $100 million labor pool. And then we also do, you know, there is work that's done in the field too. So I would say that, A, it's that we believe we can save costs with this. Do I think the normalized margin will go from 13.5%-15%? No. 13.5%-14%, maybe. It's not maybe significant.
But the other thing it allows us to do is there's at least a view that we can gain market share because of this too. Because if we could deliver a product faster than anybody else and at a lower cost, and it matters a lot on the agency, there's some speculation that, well, listen, right now, the way we do it today, we get an order for a customer, and 24 hours later, we deliver a purchase commitment. So what's the difference if it's 24 hours or 24, you know, milliseconds? What does it really matter? Well, I'll tell you what, it matters if, you know, if it's a labor product versus a data product. Because if we can produce it for, you know, half the cost that our competitors can, it really helps with our agency business because a lot of our agents buy production from us.
That is, you know, price sensitive. If we can sell them production for lower cost, that will get more business.
From a competitive advantage or like a competitive moat standpoint, what prohibits, you know, it seems like FNF or Fidelity National would have the best opportunity to replicate this, but like what type of advantage do you have on the rest of the industry?
I think it's significant because we've got years and years of title plant history. We've got more title plants, and you can't do what I'm talking about unless you have title plant data. And so you need to have these deep, rich title plants, which we have. You can't automate something unless you have the data. And since we have more data than anybody else, it really puts us in the driver's seat to capitalize on this.
And so historically, you know, to survey, to go and do the title policy, you would go to the county courthouse, right? You would go blow the dust off of old files and look at it. What are the efforts you've taken to digitize that? How long did that process take? It seems like that was an effort maybe a couple of years ago, and you guys maybe got full national coverage or close to it. So just talk about that process as well.
You think about title production and history. We used to have literally, you know, file cabinets in every county, and title would be searched in every single county locally. And then maybe, I don't know, 30 years ago or so, we said, well, let's have these centralized hubs to search it. And so we saved costs by doing it centrally. And then we offshored that as much as we could. And really, you think about like the final step is you can just automate it, make it a data product. And so that's where we're going.
What's that data yours?
It's ours because it's all public. A lot of it, if not all of it, it's public information, right? So we go to the counties and we buy it from the counties. But then we reindex it and we organize it in a way that the industry can actually search. So you could go to, I live in Orange County. You can go to Orange County and ask them for documents on Mark Seaton, and they'll give you a whole list of documents that say Mark Seaton on it. But you can't go to Orange County and say, "Give me the documents for 123 Main Street." They won't know what to do. And so we take all those documents and we reindex it so that the industry can type in 123 Main Street and get all the documents associated with that.
You can go in and capture all that data at once, or you capture it as you do a transaction and then you have the data?
We capture it every day. We go to the counties and we get all of the recorded documents related to that day, and then we index them so that when we get the order, we have it. We don't need to go to the counties because we have it in our database.
I've got one more, and we can see if we can end with an audience question as well. On the home warranty business, like I said, I feel like that's an underestimated side of the story too. I think some would argue that it would carry a higher valuation, will be more valuable than the title business. That's up for debate. But you know, your business is three times larger than Fidelity National's despite being smaller on the title side. Talk to us about how important that business is. And I've got to ask this question because I get it asked from investors all the time, but about the potential spin. You've had favorable transaction comps out there. Maybe not apples to apples exactly, but your largest public player has traded at pretty frothy multiples. So talk to us about that as well.
We have no intention to spend now. So that's not something we're focused on at all. What we are focused on and why we have home warranty is there's a lot of white space in home warranty. There's a lot, like unlike title, we're pretty much, you know, every property in America has title insurance and we're all fighting for the same deal. In home warranty, there's only 4% of homes that have a home warranty contract on it. So we've always been very good at home warranty in what we call the real estate channel, where, you know, you're going to buy a home and oftentimes the seller is going to buy you a home warranty policy as a good faith gesture for the appliances, the major appliances in the home. We've always been good in that channel.
Maybe about 10 years ago, we woke up and said, "Hey, let's try this direct-to-consumer channel," because a lot of people that would potentially want a home warranty contract that aren't in connection with a real estate transaction. So 10 years ago, direct-to-consumer was 0% of our business. Today, 42% of the contracts we have enforced were emanated from the direct-to-consumer channel. And so we're just, and we saw this last quarter, we're taking even a more aggressive view with direct-to-consumer. The thing with direct-to-consumer is you spend marketing dollars and you're cash flow negative that first year because you got to spend the dollars to get the consumer. There's a higher claims ratio the first year. But when you look at the lifetime value of that channel, it's very attractive. On the real estate side, there's only about a low 20% chance that somebody renews.
On the direct-to-consumer side, it's low 80% chance that they renew. And so you extrapolate that out, it's extremely attractive. Loses money the first year. After that, it's very, you know, it's very attractive. And so the toggle that we've had is, well, you know, the more that we grow direct-to-consumer, the worse the earnings are in the short term, but it's all about lifetime value. And so we're ramping up consumer spend because we just feel like it's going to be a good investment for the business long term.
Yeah, makes sense. you know, we're the second largest home warranty company out there. We have scale. We've got a big contractor network. I mean, it's a really good business. We've got a great management team. And so there's a lot of, you know, growth opportunities there. Our home warranty business, and I can say this about our adjacent businesses, whether it's the bank or the home warranty business or the data business, they all have higher margins and will grow faster than the title business, unless we're in some big, you know, refi boom. But overall, those have higher growth prospects than our overall title business.
From a return standpoint, I don't know how you measure this ROE or ROIC, but it's a couple of points better than title typically.
Yeah, it's actually, you know, and one of the things we've done in home warranty is we've taken dividends out, so when you look at the ROE in home warranty, it's just, it's not a capital-intensive business. It's very attractive economically.
Yeah. Any last questions from the audience? All right. I think that's a wrap. Appreciate the time, guys. Thanks so much.
Thanks for having us here, John. Appreciate it.
My pleasure. Thank you.