Arch MI’s Latest Housing and Mortgage Market Review Finds Major Recession Fears Overblown

In Arch MI’s Spring 2019 Report, the Risk of Home Price Declines Has Increased, Affordability Challenges for Millennials Are Worsening

GREENSBORO, N.C.--()--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), released today by Arch Mortgage Insurance Company (“Arch MI”), a leading provider of mortgage insurance and a wholly owned subsidiary of Arch Capital Group Ltd.

Dr. Ralph G. DeFranco, Global Chief Economist for Arch Capital Services Inc., stated that housing market trends are now nearly the complete opposite of conditions in the months prior to the Great Recession.

“A recession is inevitable at some point, but it’s likely to be far less severe for the housing market than the Great Recession,” he said. “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. What’s more, home prices were overvalued by 25% 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 continued. “The ongoing housing shortage is likely to limit price declines in a recession to 0%–5% for a year or two before home values start to recover.”

One challenge facing Millennials, now the largest group of buyers, is that the price of starter homes is appreciating at a far faster rate than other types of homes — decreasing affordability for first-time buyers. “Demand for these lower-priced homes has been increasing, but builders tend to focus on higher-end houses as construction and lot costs rise,” DeFranco said.

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

Nationally, the overall risk of a decline in home prices remains better than the historic average of 17%. 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 having lower home prices in two years are North Dakota at 27%, followed by Alaska at 24%, Wyoming at 23% and Connecticut and West Virginia, both at 22%.

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

Commentary resources:

  • The Housing and Mortgage Market Review is posted at archmi.com/hammr. The Spring 2019 edition focuses on the likelihood of a recession and the potential risk to housing, and the crisis of fewer starter homes.
  • Dr. DeFranco will host a Housing Update webinar discussing market conditions and the details of HaMMR on April 23 and 24. Registration is free at archmi.com/hammr.
  • Detailed and interactive regional graphs and maps showing home prices are also available at archmi.com/hammr by clicking on the View Our HPI Charts and Maps link.
 
Spring 2019 Arch MI Risk Index
States with the Highest Risk Index Values (Probability of Price Decline Times 100)
         
State   Risk Index   Change in Quarter
North Dakota   27   9
Alaska   24   -3
Wyoming   23   9
Connecticut   22   3
West Virginia   22   3
Oregon   21   11
Washington   19   11
Colorado   16   3
Texas   16   -2
California   12   7
   

About Arch Mortgage Insurance Company

Arch Capital Group Ltd.’s U.S. mortgage insurance operation, Arch MI, is a leading provider of private insurance covering mortgage credit risk. Headquartered in Greensboro, North Carolina, Arch MI's mission is to protect lenders against credit risk, while extending the possibility of responsible home ownership to qualified borrowers. Arch MI’s flagship mortgage insurer, Arch Mortgage Insurance Company, is licensed to write mortgage insurance in all 50 states, the District of Columbia and Puerto Rico. For more information, please visit archmi.com.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This release or any other written or oral statements made by or on behalf of Arch Capital Group Ltd. and its subsidiaries may include forward-looking statements, which reflect our current views with respect to future events and financial performance. All statements, other than statements of historical fact included in or incorporated by reference in this release, are forward-looking statements.

Forward-looking statements can generally be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe" or "continue" or their negative or variations or similar terminology. Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements includes the following: adverse general economic and market conditions; increased competition; pricing and policy term trends; fluctuations in the actions of rating agencies and our ability to maintain and improve our ratings; investment performance; the loss of key personnel; the adequacy of our loss reserves, severity and/or frequency of losses, greater than expected loss ratios and adverse development on claim and/or claim expense liabilities; greater frequency or severity of unpredictable natural and man-made catastrophic events; the impact of acts of terrorism and acts of war; changes in regulations and/or tax laws in the United States or elsewhere; our ability to successfully integrate, establish and maintain operating procedures and integrate the businesses we have acquired or may acquire into the existing operations; changes in accounting principles or policies; material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements; availability and cost to us of reinsurance to manage our gross and net exposures; the failure of others to meet their obligations to us and other factors identified in our filings with the U.S. Securities and Exchange Commission.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

ARCH MORTGAGE INSURANCE COMPANY | 230 NORTH ELM STREET GREENSBORO NC 27401 | ARCHMI.COM MCUS-B0939C-0419

© 2019 Arch Mortgage Insurance Company. All Rights Reserved. Arch MI is a marketing term for Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company. The Housing and Mortgage Market Review and Arch MI Risk Index are registered marks of Arch Capital Group (U.S.) or its affiliates. HaMMR is a service mark of Arch Capital Group (U.S.) or its affiliates.

Contacts

Arch Capital Services Inc.
Greg Hare, 336-333-0416

Method Communications
Margaret Bonaparte, 415-891-4914

Release Summary

Arch MI releases Spring 2019 Housing and Mortgage Market Review (HaMMR).

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Contacts

Arch Capital Services Inc.
Greg Hare, 336-333-0416

Method Communications
Margaret Bonaparte, 415-891-4914