First American CoreLogic Inc. says it expects its quarterly Core Mortgage Risk Index will continue to rise during the next 18 months, as declining or flat home prices put more delinquent borrowers into foreclosure.
The index attempts to gauge the likelihood of mortgage delinquencies in the next six to 12 months by tracking home prices and economic factors in 381 markets where more than nine out of 10 Americans live.
Home prices are falling or not keeping pace with inflation in 247 of 381 metropolitan areas, according to First American CoreLogic’s fourth-quarter Risk Monitor report.
Home prices are falling in 88 markets, and appreciating at less than 3 percent in 159 others, the report said. With inflation averaging around 3 percent, homeowners whose properties appreciate at a slower rate experience a decline in value in real terms.
Before the housing boom, when many markets enjoyed double-digit appreciation, houses tended to appreciate at about the same rate as inflation, said First American CoreLogic’s chief economist, Mark Fleming.
The current trend “speaks to the large correction of housing prices that’s happening nationwide,” but “doesn’t necessarily translate into mortgage risk,” Fleming said, except in markets where the economy is week and foreclosures are up.
There are still markets where foreclosure rates are low and house-price appreciation is robust, the report noted. The markets judged by First American CoreLogic to have the least risk enjoyed lower-than-average unemployment, higher wage growth, moderate house-price appreciation, low foreclosure rates, and minimal fraud and collateral risk.
The 10 lowest-risk markets and their annual appreciation rates were identified as:
- West Palm Beach-Boca R.-Boynton, Fla. (1.79 percent appreciation)
- Orlando-Kissimmee, Fla. (6.6 percent)
- Ft. Lauderdale-Pompano-Deerfield, Fla. (5.07 percent).
- Virginia Beach-Norfolk-Newport News, Va. (6.94 percent)
- Washington, D.C.-Arlington-Alexandria, Va. (3.87 percent)
- Phoenix-Mesa-Scottsdale, Ariz. (7.91 percent)
- Bethesda-Gaithersburg-Fred., Md. (-0.12 percent)
- Richmond, Va. (8.17 percent)
- Salt Lake City, Utah (13.48 percent)
- Honolulu, Hawaii (10.94 percent)
Four of the markets identified by First American CoreLogic’s as lowest risk — West Palm Beach, Orlando, Ft. Lauderdale and Phoenix — were recently singled out by PMI Mortgage Insurance Co. as markets at the greatest risk for price decline in the next two years.
PMI’s U.S. Market Risk Index takes into account factors like home-price appreciation, volatility and affordability, and also economic statistics like employment.
Fleming said the Core Mortgage Risk Index emphasized economic issues like employment and wage growth over home-price appreciation
“I would probably agree that some of those Florida markets will have (price) declines in the next two years, but we find when measuring mortgage delinquency risk, house prices are not the most important driver. Unemployment and wage growth are the fundamental risks.”
While price declines can eliminate a borrower’s equity — making it harder for them to refinance — “the two primary reasons for mortgage delinquency are loss of job and divorce, because of the financial shock to the ability to service mortgage payments,” Fleming said.
Risk is rising in many Florida and California markets, but “you have to have combination of negative equity position and stress to the economy,” Fleming said. Since many Florida and California markets continue to enjoy strong employment and wage growth, he said, they are “much less risky.”
“Theoretically, a sufficiently large decline in prices could outweigh strong economic health, but those would have to be major price declines,” Fleming said.
The 10 markets identified by First American CoreLogic as the riskiest had foreclosure rates and fraud and collateral risk indices three times higher than national average, plus higher than average unemployment and lower than average wage growth. Eight of the 10 riskiest markets were in Michigan and Ohio, where layoffs in the auto industry and businesses that support it have had an effect on housing markets.
The 10 highest-risk markets and their annual appreciation rates were identified as:
- Detroit-Livonia-Dearborn, Mich. (-0.73 percent)
- Warren-Troy-Farmington Hills, Mich. (-0.13 percent)
- Youngstown-Warren-Boardman, Ohio (2.05 percent)
- Dayton, Ohio (2.38 percent)
- Toledo, Ohio (2.15 percent)
- Cleveland-Elyria-Mentor, Ohio (2.41 percent)
- Grand Rapids-Wyoming, Mich. (1.88 percent)
- Memphis, Tenn. (4.87 percent)
- Akron, Ohio (4.49 percent)
- McAllen-Edinburg-Mission, Texas (6.64 percent)