3 indicators carriers should watch as the economy shifts

There’s been considerable talk of a potential housing slowdown on the horizon. Housing prices are faltering, homes in popular cities are staying on the market for longer and stock market instability has led to hesitance among homeowners. However, what’s also compelling, particularly in the property insurance space, is the decline in maintenance activity on the aging U.S. housing stock.

Since November 2018, maintenance activity, which encompasses work on existing structures, has slowed substantially. In January alone, BuildFax’s latest Housing Health Report saw a 6.47% year-over-year decrease in maintenance. This was the third consecutive month of slowing activity.

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Maintenance is a key indicator of property risk

Although maintenance is lesser known than other key indicators, like housing authorizations and starts, its movement is highly correlated with risk and reflects shifts in consumer confidence. Residential properties fundamentally degrade over time. This is often a result of general wear and tear, weather events and other incidentals. In insurance, this translates to a shift in risk on a carrier’s book.

Without regular maintenance work, a property’s risk profile rises substantially, eventually leading to an increase in the frequency and severity of claims. However, if an older property is well-maintained, it may behave similarly to a home that is brand new. Regular home maintenance lowers property risk. With that in mind, it’s clear the recent decrease in maintenance activity, driven by slowing local and regional efforts to maintain properties, could be laddering up to an overall increase in risk for a large portion of the housing stock.

With consistent decreases in maintenance across the U.S., it’s increasingly important that carriers track which properties are consistently maintained and which are declining due to mounting deferred maintenance. Using the most current property condition data will far outperform traditional year-built characteristics as the disparity between maintained and unmaintained properties continues to widen.

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Single-family housing authorizations see downward parallel slide to maintenance activity

Single-family housing authorizations, a highly predictive indicator of historic recessions, also saw year-over-year declines in activity over the last few months. Recent reports suggest the likelihood of a recession will almost double between 2019 and 2020, assuming analyzed factors — including single-family housing authorizations, which decreased 3.48% in January 2019 — continue to follow projected deceleration patterns.

Given the number of natural disasters over the past two years and a tightened construction labor market following global tensions and trade discussions, it is unsurprising to see declining housing activity persist into 2019. This decrease in housing authorizations will lead to fewer new homes, inevitably shrinking one of the most desirable areas of new business for carriers.

Despite declining national housing activity, some areas see reinvestment

Demolition activity, which often signifies reinvestment in a specific region, saw a slight uptick in 2018 across California, Florida and Michigan. Michigan’s strong increase in 2018 demolition activity, at 258.81% year over year, was likely a result of Detroit’s ramp-up of its demolitions program, which is the largest in the country. Notably, while demolitions are positive for a community, in the face of a potential market slowdown, it’s important to monitor post-demolition reconstruction projects, as they may not see completion, which could perpetuate housing market declines.

It remains to be seen if this activity will continue over the next few months, but as housing activity slows it will become increasingly important to monitor maintenance activity, single-family housing authorizations and demolitions.

Related: Homeownership rate hits an almost 5-year high as Gen-X returns

Holly Tachovsky is the CEO and co-founder of BuildFax, the leading provider of property condition and history insights. She can be reached at holly@buildfax.com.