Oil-producing states flagged as having higher mortgage risk

by Donald Horne06 Jul 2015
A recent housing and mortgage market review predicts a low probability of home price declines, but that the highest risk remains in oil-producing states.

Arch Mortgage Insurance’s Housing and Mortgage Market Review examines the Arch MI risk index, with the state- and city-level risk indices predicting a likelihood that home prices in a state or Metropolitan Statistical Area (MSA) will decrease over the course of two years, based on recent economic and housing market data.

“Our data shows that states with high levels of employment in the oil extraction and related industries continue to have elevated risk scores,” said Dr. Ralph DeFranco, senior director of risk analytics and pricing at Arch MI. “The Spring Edition of Arch MI’s Housing and Mortgage Market Review shows that, while the national average risk score remains stable and at a low level of 8%, North Dakota, Oklahoma and Texas continue to have elevated risks due to their exposure to the oil sector.”

Oklahoma and Texas rose to moderate-risk from the low-risk category, joining North Dakota as their economies cool due to the industry-wide drop in oil and gas exploration.

These states had identical risk scores of 33%, increasing from 27% and 24%, respectively.

Moving up in the risk rankings was Mississippi, with a score that rose from 7% to 18% as the result of an increase in mortgage delinquencies. This has shifted the state into the low-risk from the minimal-risk category.

Moving down from moderate-risk to low-risk in the rankings was Louisiana, as its risk score declined from 35% to 27%. This positive shift is attributable to increases in home prices and the decline of loans in foreclosure.

Dallas-Plano-Irving and San Antonio-New Braunfels, Texas, were the two most risky of the nation’s 50 largest MSAs. With a 42% probability of home price declines within the next two years, these two MSAs rank in the moderate-risk category.

Home prices in this region are well above their historic long-term trends (based on income), so affordability remains a concern. Employment in these regions is currently solid, however the effects of the drop in oil prices are just starting to emerge.

Also moving up into the moderate-risk category were two additional Texas MSAs, including Houston-Sugar Land-Baytown and Austin-Round Rock-San Marcos, primarily due to relatively high home prices compared to income.

The Housing & Mortgage Market Review is published seasonally by Arch MI. The risk index is a proprietary statistical model that measures home price risk by estimating the probability that home prices in a state or one of the nation’s 384 largest metropolitan statistical areas (MSAs) will be lower in two years, times 100.

The Arch MI risk index weights various local economic and housing market factors, such as affordability, unemployment rates, economic growth rates, net migration, housing starts, etc. based on a statistical model built on data going back to the early 1980s. It is updated after each quarterly release of the FHFA All-Transactions Regional Housing Price Index (HPI).


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