Home prices will increase in 2019, especially in the urban neighborhoods and cities that attract millennials, Arch Mortgage Insurance Co. reported Thursday.
The national average home price is likely to increase between 2% and 5%, worsening overall affordability, even as some slow-growing markets experience price declines, according to Arch MI’s winter edition of The Housing and Mortgage Market Review.
The review sees little chance of a housing bust because the typical warning signs of a widespread housing bubble are not evident.
“The housing market has gone from a full boil to a slow simmer, but it’s nowhere near ice-cold,” Ralph DeFranco, global chief economist for Arch Capital Services, said in a statement. “An ongoing housing shortage, together with a strong job market, means home prices will increase in many markets nationally.”
DeFranco said a rebalancing would take place with limited and short-lived price declines in some regions where prices skyrocketed in recent years, and in weaker housing markets, such as industrial centers and energy-producing states. Here are his five predictions for the market this year:
1. Home prices will increase, with only minor exceptions.
DeFranco says that although the national average home price is likely to increase, regional home price changes will vary widely based on local supply and demand conditions. Retirement areas near water and metro areas popular with professionals and foreign buyers are likely to do well. At the same time, some limited and short-lived price declines may occur as housing markets rebalance and adapt to higher interest rates. Most at risk of price declines are metro areas with the hottest markets in recent years, and regions that already have relatively weak housing markets.
2. Millennials drive the hottest markets.
Neighborhoods in, or close to, downtowns and vibrant areas near universities draw millennials. DeFranco notes that these areas have done better than average in recent decades during both booms and busts, at least in cities that are attracting workers from other areas, such as Washington, D.C., Seattle and Denver. This trend continued in 2018, with above-average home price growth in areas with the most millennial buyers who now dominate the first-time homebuyer market.
3. Credit risk will increase.
The reason: A combination of relaxed lending guidelines (albeit stricter ones than existed from 2005 to 2008) and the trend to higher debt-to-income ratios and loan-to-value ratio, which is driven by worsening affordability. In addition, credit risk from economic factors may be higher since some forecasters see a recession in 2020 because of the way current tax and spending laws are structured.
“One implication of any loosening at the margins would be increased housing demand (all else remaining equal), particularly for starter homes,” DeFranco says.
4. Housing affordability will continue to worsen.
Both interest rates and home prices are forecasted to increase, hurting affordability. Even though higher interest rates reduce home sales, modest increases in mortgage rates are not as apocalyptic for housing as many believe, DeFranco says. Historically, rising rates caused only temporary, mild slowdowns in home sales, between 5% and 10%. If rates increase this year, he says, total originations may fall because of fewer refinancing loans, loans with low mortgage rates will remain in investors’ portfolios longer than usual and there will be fewer trade-up home sales, which will keep inventory tight, affecting millennials the most.
5. No bursting housing bubble.
Why? No widespread housing bubble exists. DeFranco notes the lack of typical warning signs — excessive debt levels, poor quality loans, exponentially increasing home prices, rising vacancy rates and a high number of internet searches on house flipping. The only red flag at present is poor affordability in many metro areas compared with the past. But the trend of firms to concentrate in denser cities, along with interest rates below the historical average, suggests that high home prices are more supportable than 10 years ago.
Arch MI Risk Index
Arch MI reported that its quarterly Risk Index, a statistical model based on nine indicators of the health of local housing markets, puts the probability of home prices being lower in two years at an unusually low 6%. It said every state is expected to have positive home price growth over the next two years.
Those states with the highest risk of having lower home prices in two years are Alaska at 27% and West Virginia and Connecticut, both at 19%.
Among larger metro areas, Houston and San Antonio, both at 20%, are the riskiest because their home prices are far higher than expected compared with the historical relationship between prices and incomes.
Of the other 10 cities most at risk of price declines, Portland, Oregon, had the largest increase in risk because home prices there are much higher than expected, based on historical trends.
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