“Energy Patch” states at risk for housing price declines

by Donald Horne12 Jan 2016
“Home prices are holding up well – the question is: will they continue to hold up with the most recent drop in oil prices?” says Ralph G. DeFranco, senior director of risk analytics and pricing at Arch MI. “No one has a perfect crystal ball; we’re just flagging it as a potential higher risk than the rest of the country.”

The likelihood of home price declines across the United States over the next two years remains low at 6%, according to the Arch Mortgage Insurance Company Winter 2016 Housing and Mortgage Market Review, which contains the latest Arch MI Risk Index model results.

Despite the continued low national risk, “Energy Patch” states – coal-, oil- or natural gas- producing states – are significantly more at risk as they continue to experience the fallout from large drops in energy prices.

“Nationwide, the housing market is likely to strengthen over the coming year in spite of economic headwinds from a strong dollar and expected gradual rate increases by the Federal Reserve,” says DeFranco.  ”Despite this forecast, ’Energy Patch’ states such as North Dakota, Wyoming, West Virginia and Alaska are at greatest risk of experiencing declining prices as their economies continue to slow due to continued fallout from the large drop in coal, oil and natural gas prices seen over the last year. In addition, Texas has the riskiest MSAs (Metropolitan Statistical Areas) due to oil price declines.”

The report, released today by Arch MI, a leading provider of private mortgage insurance and wholly owned subsidiary of Arch Capital Group Ltd., models the state- and metro-level risk indices to predict the likelihood that home prices in a region will decrease over the next two years, based on recent economic and housing market data.

“Apart from these few exceptions, national prices should rise faster than inflation over the coming years due to a number of strong fundamentals, including: a shortage of homes for sale or rent, better than average affordability, and continued job growth of 2 to 3 million jobs a year,” he says.  “There is no bubble going on here; the housing market is safe.”

On a state level, North Dakota, Wyoming, Alaska, West Virginia and New Mexico have the highest Arch MI Risk Index values. Total employment continues to weaken in these states, even as home prices continue to rise. Although conditions will likely be weak for several more years, the odds still favor positive (but weak) home price growth for most of the region.

“We’re in a lot different world than we were in the mid-1980s,” DeFranco told MPA. “There’s no way I can envision a massive bust, because that had a major financial sector meltdown, which doesn’t make any sense in today’s environment to me.”

North Dakota has the highest Arch MI Risk Index value of 46 (46% change of any sized price decline), primarily due to the 2.9% decline in employment over the past year. North Dakota’s home prices are estimated to be overvalued by 20% in the aftermath of the oil fracking boom and bust. 



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