Low chance of housing-price declines keeps unaffordability a concern

by Francis Monfort27 Jul 2017
It is highly unlikely that housing prices will decline over the next two years, according to a recent report by Arch Mortgage Insurance.

Data revealed there is only an average 4% risk that home prices will decline in the next two years given the strong fundamentals in the housing market. While a drop in prices is less of a concern, housing affordability has increasingly become a problem in most US cities.

“A tight job market, interest rates that are still low and an overall shortage of housing are pushing up home prices faster than incomes,” said Ralph DeFranco, Arch’s global chief economist for mortgage services. “That’s good news for those who already own, but bad news for those looking to buy. I expect prices and rates to rise, meaning affordability will only worsen from here. In fact, once mortgage interest rates reach 5%, homeownership in high-cost areas like California could be out of reach for many people who qualify now.”

While risk of home-price declines are generally low across the US, some states still face substantial risk. Alaska, North Dakota, Wyoming and West Virginia have the highest risk of home-price declines as they continue to see weak employment and poor homes sales driven by a surplus of homes for sale and the unraveling of the energy boom.

North Dakota has the highest chance of a price decline over the next two years at 38%, with weak home sales and decelerating home-price growth. Additionally, home prices in the state have historically been disproportionate to incomes. The continued recession in Wyoming due to the decline in mining contributes to its high risk of price decline. However, employment in the state is showing signs of moderating.

The high risk in Alaska is also driven by its continued recession following a drop in oil production and sizable deficits in the state budget. Employment weakness in West Virginia contributed to its high risk of price drops.

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