Risk Index Forecasts Low Odds of Price Declines in Coming Years

The probability that home prices will drop in the next two years fell again in the second quarter, reflecting increasingly stable market conditions, according to a measure released this week.

Looking at economic and housing market indicators in the second quarter, Arch Mortgage Insurance Company (Arch MI) says the odds of a decline in home prices in the next two years on the national level are 13 percent, down from 15 percent in the company's summer estimate.

The company bases its prediction on a review of several factors, including affordability conditions, unemployment rates, and price growth.

Arch MI says the United States' current economic health puts the country's risk of future price decreases at "minimal." By comparison, an average of 11 percent of metropolitan statistical areas (MSAs) experienced price declines in the pre-crisis era between 1980 and 1999, according to the company.

At the state level, only Florida, New Jersey, and New York fell into the "moderate" risk category, each posting index values above 25—meaning at least a 25 percent chance of price drops in those states in the coming years.

"These states are of the greatest concern due to higher-than-average mortgage delinquencies and generally weak economic conditions," Arch MI explained in its report.

A handful of states ranked in the 11–20 index range, classifying them as "low" risk states. That group included several of those hit worst in the housing crash—including California, Arizona, and Nevada, due to their price volatility—and a few others with higher than average unemployment such as Rhode Island and Washington, D.C.

Arch MI categorized the remainder of states as "minimal" risk.

Out of the 384 metropolitan areas tracked in the report, New Jersey's Atlantic City ranked as the riskiest in terms of imminent price drops with an estimated 84 percent probability of a decline. The area has already seen prices come down over the past year, and high unemployment is expected to drive further drops, Arch MI says.

Of the 50 most populous MSAs, four fall within the moderate risk category, including two in California: San Francisco-San Mateo-Redwood City and Santa Ana-Anaheim-Irvine, largely thanks to their low affordability. The New York City metro also made the list for the same reason, while Detroit's weak economy earned it a spot at the top.