Housing risk index finds recession fears ‘overblown’

Housing risk index finds recession fears ‘overblown’

GREENSBORO, N.C. – Apr 10, 2019 – 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) by Arch Mortgage Insurance Company.

Housing market trends are now nearly the complete opposite of conditions in the months prior to the Great Recession, according to Dr. Ralph G. DeFranco, global chief economist for Arch Capital Services.

“A recession is inevitable at some point, but it’s likely to be far less severe for the housing market than the Great Recession,” DeFranco says. “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.”

DeFranco also notes that home prices were overvalued by 25 percent 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 says. “The ongoing housing shortage is likely to limit price declines in a recession to 0-5 percent for a year or two before home values start to recover.”

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