Housing risk index finds recession fears ‘overblown’

GREENSBORO, N.C. – Apr 10, 2019 – Research on how past recessions affected home values shows current conditions – including a shortfall in housing construction – likely mean the next recession will have a less severe impact on housing than the recession in 2008 did, according to the spring edition of The Housing and Mortgage Market Review (HaMMR) by Arch Mortgage Insurance Company.

Housing market trends are now nearly the complete opposite of conditions in the months prior to the Great Recession, according to Dr. Ralph G. DeFranco, global chief economist for Arch Capital Services.

"A recession is inevitable at some point, but it's likely to be far less severe for the housing market than the Great Recession," DeFranco says. "We estimate that the current market is underbuilt by 1 million or more homes, buyers are more cautious and loan quality is far higher. In 2007, conditions were completely flipped: housing was hugely overbuilt, speculative demand was off the charts and the market was awash with high-risk loan products."

DeFranco also notes that home prices were overvalued by 25 percent or more then and are closer to expected values now.

"In the 11 recessions recorded over the past 80 years, major price declines for housing have been more the exception than the rule, with home values only turning negative once in the five recessions since 1975," he says. "The ongoing housing shortage is likely to limit price declines in a recession to 0-5 percent for a year or two before home values start to recover."

The quarterly Arch MI Risk Index, a statistical model based on nine indicators of the health of local housing markets, suggests that the probability U.S. home prices will be lower in two years is 9 percent, an increase from 6 percent in the previous HaMMR.

In Florida, an Arch index infographic suggests that Florida home values have only a 6 percent chance of declining in two years. However, a higher risk (25 percent) in Miami suggests the chances are even lower in the rest of the state.

Nationally, the overall risk of a decline in home prices remains better than the historic average of 17 percent. Every state is expected to have positive home price growth over the next two years, continuing recent trends.

The states with the highest risk of lower home prices in two years are North Dakota (27 percent), Alaska (24 percent), Wyoming (23 percent) and Connecticut and West Virginia, both at 22 percent.

Among the 100 largest metros, the areas with the highest risk of having lower home prices in two years are Miami and San Antonio, Texas (25 percent), because of overvalued home prices. Those areas are followed by three metros in Connecticut – Bridgeport-Stamford, Hartford and New Haven (all at 22 percent) – which have shrinking populations of homebuyers and a state economy that lags behind the nation.

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