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What Housing Bubble?

Home prices have been on the rise for quite some time, but home sales are now on the decline. The economy is strong with unemployment at historic lows, but some are pointing to an economic slowdown. Is the housing bubble about to burst? Definitely not, according to Ralph DeFranco, Global Chief Economist Mortgage Services at Arch Capital Services, Inc.

There’s no bubble to burst, he says.

“The housing market is caught in the middle of a tug-of-war between poor affordability on one side and on the other, a strong economy teamed up with a tight supply of homes,” he said in Arch Capital Services’ Winter 2019 Housing and Mortgage Market Review.

However, after persistent and steep price inclines, DeFranco says now, “The shift in the balance of power is clear. An undeniable slowdown has arrived, particularly in the least affordable areas.”

But take heart. It’s not a bubble bursting. DeFranco says “there’s no need to panic. The evidence suggests we are only moving from a market that strongly favors sellers to a market more evenly balanced between buyers and sellers.”

In fact, DeFranco expects home prices to continue to grow this year, despite rising interest rates. Overall, he expects prices to rise between 2 and 5 percent over the year. However, price changes will vary widely at the market-level.

Housing markets with large retirement communities, near the water, and metros that attract professionals and foreign buyers will continue to experience price growth in the coming year; while markets that have experienced the steepest price increases in the past few years, markets that are currently weak, areas with economies reliant on the energy sector, and former industrial centers may experience price declines, according to DeFranco.

The quarterly Arch MI Risk Index, which measures where home prices are most likely to fall over the next two years, determined that at the national level home prices have a 6 percent chance of declining over the next two years. This compares to a historic average of 17 percent.

The 10 states where prices have the highest probability of declining are:

  • Alaska
  • West Virginia
  • Connecticut
  • North Dakota
  • Texas
  • Wyoming
  • Colorado
  • Oklahoma
  • Mississippi
  • Idaho

Alaska has the greatest probability of falling home prices with a 27 percent chance, according to Arch MI’s data. West Virginia follows with a 19 percent chance.

Six of the states listed in the top 10 list are experiencing “the lingering effects of slowdown in the energy-extraction sector and weaker energy prices,” according to Arch MI.

Taxes are the culpable factor in Connecticut’s placement in the top 10 as the state has high costs and high taxes compared to many others, and Arch MI anticipates the state “may suffer disproportionally from new federal tax limitations on state and local tax deductions.”

Lastly, Colorado and Idaho placed in the top 10 mainly due to the higher-than-normal home prices in these states currently.

Aside from overall continued price growth, albeit uneven and with some exceptions, DeFranco pointed out a few other expectations for the housing market in 2019.

One is that millennials will continue to be a determining factor in which markets are the “hottest.” Prices will rise most in areas favored by millennials.

Rising home prices, alongside increasing mortgage rates, will take a toll on affordability. DeFranco said that with the economy performing well and the “tax cut adding an oddly timed and only temporary stimulus,” the Federal Reserve should raise interest rates this year.

Also, credit risk will increase this year as credit continues to loosen and the mortgage industry continues its trend toward loans with higher debt-to-income and loan to value ratios. Loosening credit may drive increased demand in the housing market.

In the meantime, the housing supply shortage is not likely to subside any time soon, according to the report.

About Author: Krista Franks Brock

Krista Franks Brock is a professional writer and editor who has covered the mortgage banking and default servicing sectors since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.
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