production. But it’s a high-tax state where many companies are leaving. That’s causing the population to
“And that’s the worst-possible scenario for home
prices, when the population declines, because you
don’t take the house with you [when moving out of
state],” DeFranco says.
One variable that the statistical model looks at is what
homebuyers in a given area have been willing to pay
for housing in the past. Homebuyers in California, for
instance, have been willing to devote a larger percentage of their income to a mortgage payment than
borrowers in the Midwest.
That’s why Texas and Florida both land on the list,
DeFranco said. Home prices in both states have been
rising faster than incomes, meaning that people are
paying more for their homes relative to their paychecks.
Both states have seen a large in-migration of people.
So this may be a blip, or it may not.
“It may be a new normal,” DeFranco said. “There’s no
way to tell.”
Florida actually recorded the biggest jump on the
home-price decline at-risk list, going from a 3 percent
chance of a decline at the end of 2017 to 15 percent
chance as of this past spring.
That puzzles Brad O’Connor, the chief economist for
Florida Realtors. He doesn’t think much has changed in
his state from last year to this year with regard to real
estate. So why did Florida see such a big jump? “As
an economist, I’m going to be the first to admit we’re
not always very good at forecasting,” O’Connor says.
He thinks a one-size-fits-all model for the U.S. may
be overlooking important factors in Florida. Among
them are the amount of outside investment — both
domestically and internationally — that the state
attracts. In addition, parts of the state — especially
South Florida — are running out of room to grow.
The U.S. has added 16 million jobs from 2008 and 2017. The number of households has grown by 10 million over the same period. Butfewerthan 9millionnewhomes
This simple supply-and-demand equation offers one
of the explanations for why home prices have been on
such a torrid pace over the past few years. Still, even
in the best of markets, there’s a chance that home
prices in isolated pockets around the country could
decline. That’s a point made in the recent Housing and
Mortgage Market Review report by Arch Mortgage
The quarterly report, published this past spring,
ranks the top 10 states around the U.S. that are most at
risk for a price decline in the next two years. The report
emphasizes, however, that local housing busts are
“We don’t say the size of the decline. The price decline could be [as little as] 1 or 2 percent,” says Ralph
DeFranco, global chief economist of Arch Capital Services, which helped put together the report.
The 10 states on the Arch Mortgage list, with their
respective risk-of-decline percentages, are the following: Alaska, 28 percent; North Dakota, 27 percent;
Wyoming, 25 percent; West Virginia, 24 percent;
Florida, 15 percent; Connecticut, 14 percent; Oklahoma,
14 percent; Texas, 14 percent; Mississippi, 10 percent;
and New Mexico, 10 percent.
For the report, Arch Capital Services puts together
a statistical regression model — a way of estimating
relationships among variables. In this case, DeFranco
and his team looked at the current unemployment
rate, changes in population, how the economy is
growing by region, housing starts and other housing
data. “The model is coming out with very low numbers,
with just a few exceptions in the energy-patch states
like Alaska and North Dakota,” DeFranco says.
Lump Alaska, North Dakota, Wyoming and Oklahoma
together. Those states have suffered job losses because
of oil-price declines. While oil prices recently have begun to rise again, drillers also have become more efficient at getting oil out of the ground, DeFranco said. “So
even though they’re adding a lot of people, they aren’t
paying them crazy amounts of money,” DeFranco says.
West Virginia is a special case, because it relies heavily on coal. And that could spell trouble for the state.
“The price of coal is low because it competes with natural
gas, and that’s not going to change,” DeFranco says.
Connecticut is a deviation from the energy-patch
theme in that its economy isn’t driven by energy
O’Connor says home-price declines in Florida would
only occur in the next couple of years if something
dramatic happens. “In terms of prices declines, it would
have to be a pretty decent rise in mortgages rates to
put a damper on demand or perhaps a recession,”
Alaska is deeply tied to oil prices. In fact, the Alaska
Legislature needed to tap into a reserve fund to pass
a state budget this year, says Gwen Place, president of
the Alaska Association of Realtors.
She notes that Alaska is a big state, and she’s most
familiar with her corner of it, around the Juneau area.
Place says she could see a weakening of the housing
market, but that doesn’t necessarily mean price declines are in the cards. It could be that, in the near future,
buyers may not need as much of a downpayment, or
maybe sellers will have to agree to pay for certain costs,
such as a new roof.
“There are other concessions to be made other than
price,” Place says
Half of the states that land on Arch Mortgage’s recent
at-risk list actually have seen the chance for a home-
price decline decrease. North Dakota late last year had
a 38 percent chance of a decline, for example, and that
dropped to 27 percent this year. That’s because, at the
end of the day, the fundamentals of the housing market
aren’t changing, DeFranco says.
“If we were to look at this over time, we could conclude this is a pretty safe time overall,” DeFranco says.
“There’s a shortage of homes, the number of households has been growing faster than the number of new
homes built, so what we’re seeing is extremely tight
inventory coast to coast.
“That’s not changing,” he adds. “Builders are ramping
up, but there’s still a backlog, and they’re still not building enough.” n
By Jim Davis
“There are other
concessions to be
made other than
President, Alaska Association
Some markets face a higher risk of home-price declines
Jim Davis is editor of Scotsman Guide Residential Edition.