[January 23, 2018]

Arch MI Releases Housing Predictions Through 2020, Including Impact of Tax Policy on Home Price Growth

U.S. housing prices will continue to increase by 2-6 percent annually, particularly in the entry-level market, according to the Winter 2018 edition of The Housing and Mortgage Market Review^® (HaMMR^SM), released today by Arch Mortgage Insurance Company ("Arch MI").

This assessment is based on the latest quarterly Arch MI Risk Index^®, a statistical model based on recent housing market indicators. The index suggests that the average probability of home price declines in America's 401 largest cities remains unusually low, at 5 percent. This trend reflects broad-based favorable fundamentals, such as a tightening job market, relatively low interest rates and a limited number of homes for sale.

The Winter 2018 edition also introduces Arch's Estimated Fundamental Home Value Index (Fundamental HVI), a new tool that identifies housing bubbles by analyzing home prices across 50 states and 401 metros. The amount by which home prices are over- or undervalued is derived from the Fundamental HVI, an estimate of the underlying economic value to which home prices tend to gravitate when not overly influenced by short-term factors, fads or unrealistic expectations. It is a statistical model based on the historical relationship between incomes and home prices.

"With interest rates and home prices both on the rise, first-time homebuyers - largely Millennials - may want to consider making the jump from renting to owning sooner rather than later," said Dr. Ralph G. DeFranco, Global Chief Economist, Mortgage Services, Arch Capital Services Inc. "Our research shows few signs of a housing bubble because the typical warning signs aren't present. Overall, the shortage of housing paired with a robust job market should keep the housing market strong and growing, short of an unexpected event and despite the contrary pressures that may be created by the tax bill."

The HaMMR Report also analyzes the impact of the new U.S. tax code on housing. The report notes that changes may hurt higher-cost, high-tax markets, but benefit lower-cost areas. Limitations on the deductibility of state, local and property taxes will mean higher taxes for many in the upper middle class and the result will be a permanent dampening effect in high-cost areas relative to the previous tax rules. The hardest-hit states are New York, New Jersey, Connecticut, California and Maryland. Additionally, some areas may see price declines, with Connecticut and New Jersey most at risk due to the weakness of their home price growth and population growth. In general, home prices in higher-cost areas are still likely to grow due to economic growth, but at a slower rate.

Commentary resources:

• The Housing and Mortgage Market Review is posted at archmi.com/hammr. The Winter 2018 edition summarizes current U.S. housing market conditions, looks at the effects of the new tax bill across regions and describes Arch's Estimated Fundamental Home Value Index in greater detail.
• Dr. DeFranco will host two webinars discussing housing market conditions and the details of Arch MI's latest Housing Review on February 5 and 6, 2018. Registration is free at archmi.com/hammr.
• Detailed and interactive regional graphs and maps showing home prices and estimates of over-/undervaluation are also available at archmi.com/hammr; click on the HPI (News - Alert) Charts link.

At the state level, the risk of home prices being lower in two years remains concentrated in energy-extraction regions. Because of higher energy prices, many of those areas improved this quarter. Exceptions include Alaska (at 37 percent) which remains in recession with the highest unemployment rate in the nation, and Texas, which increased to 12 percent primarily due to home prices growing faster than incomes, hurting affordability. The risk in Connecticut increased because home price growth is weak and because of the recent tax legislation.

About Arch MI's Housing and Mortgage Market Review, Risk Index and Fundamental HVI

The Housing and Mortgage Market Review (HAMMR), which presents Arch MI Risk Index results, is published quarterly by Arch Mortgage Insurance Company. The Risk Index is a proprietary statistical model that measures home price risk by estimating the probability that home prices in a state or one of the nation's 401 largest metropolitan statistical areas (MSAs) will be lower in two years. For example, a score of 25 indicates a 25 percent chance the FHFA All-Transactions Regional Housing Price Index (HPI) will be lower in two years. The Arch MI Risk Index weights various local economic and housing market factors, such as affordability, unemployment rates, economic growth rates, net migration, housing starts, etc., based on a statistical model built on data going back to the early 1980s. It estimates the likelihood of seeing negative home prices, and does not indicate the size of any declines. The latest HaMMR, Risk Index, local housing percent over-/undervaluation can be reviewed at archmi.com/hammr.

Fundamental HVI is a statistical model based on the historical relationship between incomes and home prices.

Detailed, interactive regional graphs and maps are available on Arch MI's website, showing relative over- or undervalued home prices at archmi.com/HPI-Charts-and-Maps.

ABOUT ARCH MORTGAGE INSURANCE COMPANY

Arch Capital Group Ltd.'s U.S. mortgage insurance operation, Arch MI, is a leading provider of private insurance covering mortgage credit risk. Headquartered in Greensboro, North Carolina, with significant operations in Walnut Creek, California, Arch MI's mission is to protect lenders against credit risk, while extending the possibility of responsible homeownership to qualified borrowers. Arch MI's flagship mortgage insurer, Arch Mortgage Insurance Company, is licensed to write mortgage insurance in all 50 states, the District of Columbia and Puerto Rico. For more information, please visit archmi.com.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This release or any other written or oral statements made by or on behalf of Arch Capital Group Ltd. and its subsidiaries may include forward-looking statements, which reflect our current views with respect to future events and financial performance. All statements, other than statements of historical fact included in or incorporated by reference in this release, are forward-looking statements.

Forward-looking statements can generally be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe" or "continue" or their negative or variations or similar terminology. Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements includes the following: adverse general economic and market conditions; increased competition; pricing and policy term trends; fluctuations in the actions of rating agencies and our ability to maintain and improve our ratings; investment performance; the loss of key personnel; the adequacy of our loss reserves, severity and/or frequency of losses, greater than expected loss ratios and adverse development on claim and/or claim expense liabilities; greater frequency or severity of unpredictable natural and man-made catastrophic events; the impact of acts of terrorism and acts of war; changes in regulations and/or tax laws in the United States or elsewhere; our ability to successfully integrate, establish and maintain operating procedures and integrate the businesses we have acquired or may acquire into the existing operations; changes in accounting principles or policies; material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements; availability and cost to us of reinsurance to manage our gross and net exposures; the failure of others to meet their obligations to us, and other factors identified in our filings with the U.S. Securities and Exchange Commission.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

ARCH MORTGAGE INSURANCE COMPANY | 230 NORTH ELM STREET GREENSBORO NC 27401 | ARCHMI.COM MCUS-BO452B-0118

© 2018 Arch Mortgage Insurance Company. All Rights Reserved. Arch MI is a marketing term for Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company. The Housing and Mortgage Market Review and the Arch MI Risk Index are registered marks of Arch Capital Group (U.S.) or its affiliates. HaMMR is a service mark of Arch Capital Group (U.S.) or its affiliates.

View source version on businesswire.com: http://www.businesswire.com/news/home/20180123005061/en/

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