Likelihood of U.S. Home Price Decline – 4 Percent and Dropping

A quarterly mortgage risk report finds only a 2% chance Florida home prices will decline over the next two years. Energy-job-dependent states such as West Virginia face the highest risk.

WALNUT CREEK, Calif. – September 29, 2016 – The likelihood of home price declines across the United States over the next two years remains very low – only 4 percent, according to the Fall 2016 Housing and Mortgage Market Review published by Arch Mortgage Insurance Company.

While the overall risk is only 4 percent, it's also on the decline. One year ago, the risk was 6 percent; two years ago, it was 13 percent. In Florida, the two-year risk of a housing price decline is only 2 percent.

Despite the low overall risk of home price declines, however, some areas of the U.S. have decelerating home price growth and remain at heightened risk for home price declines. Those areas are generally the energy-extraction (coal, oil or natural gas) states.

"Apart from some underlying issues that continue to hold back the housing sector, ranging from weak wage growth to skyrocketing student debt, strong dynamics are now in place that will continue pushing up home prices faster than inflation for the foreseeable future," says Dr. Ralph G. DeFranco, global chief economist, mortgage services at Arch. "Positive fundamentals in today's housing market include affordability, job growth, a shortage of housing, rising rents and underpriced or fairly valued housing in most areas of the country. Given these positives for home prices, it isn't surprising that there is a low probability home prices will decrease in two years."

The report presents the state- and metro-level Arch MI Risk Index. The company bases its risk assessment on recent economic and housing market data.

The Fall 2016 edition also has a special report on regional oil shocks and the home price index that compares the decline in oil prices over the past two years to the oil shock of the mid-1980s. Although there was a similar decline in crude oil prices of roughly 60 percent both then (November 1985 to March 1986) and now (June 2014 to year-end 2015), the size of the employment shock in the 1980s was far larger than the most recent event.

Today's housing market has been less affected by the decline in oil prices, thanks to both a greater economic diversity and because the 1980s home-price drop was amplified by the savings and loan crisis.

On a state level, North Dakota, Wyoming and West Virginia remain the states most at risk of home prices declines. The economies in these three states are currently in recession with weakening employment, due primarily to declines in energy-related jobs. North Dakota has the highest Arch MI Risk Index value at 47 (a 47 percent chance of a price decline of any magnitude over the next two years); Wyoming has a Risk Index of 44; West Virginia has a Risk Index of 31.

© 2016 Florida Realtors®. All rights reserved. Reprinted with permission.