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Residential Department: BackSpace: July 2018

 

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Some markets face a higher risk of home-price declines

The U.S. has added 16 million jobs from 2008 and 2017. The number of households has grown by 10 million over the same period. But fewer than 9 million new homes were constructed.

This simple supply-and-demand equation offers one of the explanations for why home prices have been on such a torrid pace over the past few years. Still, even in the best of markets, there’s a chance that home prices in isolated pockets around the country could decline. That’s a point made in the recent Housing and Mortgage Market Review report by Arch Mortgage Insurance.

The quarterly report, published this past spring, ranks the top 10 states around the U.S. that are most at risk for a price decline in the next two years. The report emphasizes, however, that local housing busts are unlikely.

“We don’t say the size of the decline. The price decline could be [as little as] 1 or 2 percent,” says Ralph DeFranco, global chief economist of Arch Capital Services, which helped put together the report.

The 10 states on the Arch Mortgage list, with their respective risk-of-decline percentages, are the following: Alaska, 28 percent; North Dakota, 27 percent; Wyoming, 25 percent; West Virginia, 24 percent; Florida, 15 percent; Connecticut, 14 percent; Oklahoma, 14 percent; Texas, 14 percent; Mississippi, 10 percent; and New Mexico, 10 percent.

For the report, Arch Capital Services puts together a statistical regression model — a way of estimating relationships among variables. In this case, DeFranco and his team

looked at the current unemployment rate, changes in population, how the economy is growing by region, housing starts and other housing data. “The model is coming out with very low numbers, with just a few exceptions in the energy-patch states like Alaska and North Dakota,” DeFranco says.

Lump Alaska, North Dakota, Wyoming and Oklahoma together. Those states have suffered job losses because of oil-price declines. While oil prices recently have begun to rise again, drillers also have become more efficient at getting oil out of the ground, DeFranco said.

“So even though they’re adding a lot of people, they aren’t paying them crazy amounts of money,” DeFranco says.

West Virginia is a special case, because it relies heavily on coal. And that could spell trouble for the state. “The price of coal is low because it competes with natural gas, and that’s not going to change,” DeFranco says.

Connecticut is a deviation from the energy-patch theme in that its economy isn’t driven by energy production. But it’s a high-tax state where many companies are leaving. That’s causing the population to decline slightly.

“And that’s the worst-possible scenario for home prices, when the population declines, because you don’t take the house with you [when moving out of state],” DeFranco says.

One variable that the statistical model looks at is what homebuyers in a given area have been willing to pay for housing in the past. Homebuyers in California, for instance, have been willing to devote a larger percentage of their income to a mortgage payment than borrowers in the Midwest.

There are other concessions to be made other than price.

That’s why Texas and Florida both land on the list, DeFranco said. Home prices in both states have been rising faster than incomes, meaning that people are paying more for their homes relative to their paychecks. Both states have seen a large in-migration of people. So this may be a blip, or it may not.

“It may be a new normal,” DeFranco said. “There’s no way to tell.”

Florida actually recorded the biggest jump on the home-price decline at-risk list, going from a 3 percent chance of a decline at the end of 2017 to 15 percent chance as of this past spring.

That puzzles Brad O’Connor, the chief economist for Florida Realtors. He doesn’t think much has changed in his state from last year to this year with regard to real estate. So why did Florida see such a big jump? “As an economist, I’m going to be the first to admit we’re not always very good at forecasting,” O’Connor says.

He thinks a one-size-fits-all model for the U.S. may be overlooking important factors in Florida. Among them are the amount of outside investment — both domestically and internationally — that the state attracts. In addition, parts of the state — especially South Florida — are running out of room to grow.

O’Connor says home-price declines in Florida would only occur in the next couple of years if something dramatic happens. “In terms of prices declines, it would have to be a pretty decent rise in mortgages rates to put a damper on demand or perhaps a recession,” O’Connor says.

Alaska is deeply tied to oil prices. In fact, the Alaska Legislature needed to tap into a reserve fund to pass a state budget this year, says Gwen Place, president of the Alaska Association of Realtors.

She notes that Alaska is a big state, and she’s most familiar with her corner of it, around the Juneau area. Place says she could see a weakening of the housing market, but that doesn’t necessarily mean price declines are in the cards. It could be that, in the near future, buyers may not need as much of a downpayment, or maybe sellers will have to agree to pay for certain costs, such as a new roof.

“There are other concessions to be made other than price,” Place says.

Half of the states that land on Arch Mortgage’s recent at-risk list actually have seen the chance for a home-price decline decrease. North Dakota late last year had a 38 percent chance of a decline, for example, and that dropped to 27 percent this year. That’s because, at the end of the day, the fundamentals of the housing market aren’t changing, DeFranco says.

“If we were to look at this over time, we could conclude this is a pretty safe time over-all,” DeFranco says. “There’s a shortage of homes, the number of households has been growing faster than the number of new homes built, so what we’re seeing is extremely tight inventory coast to coast.

“That’s not changing,” he adds. “Builders are ramping up, but there’s still a backlog, and they’re still not building enough.” 


 

Jim Davis is editor of Scotsman Guide Residential Edition. Reach him at (800) 297-6030 or jimd@scotsmanguide.com.

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