Study Identifies Regions
Most Likely to Lose Value
March 7, 2005 -- Homeowners in the hottest markets are facing a greater chance that the value of their houses will decline, according to a new study, though risks have lessened slightly for the nation as a whole.
In its recently released winter 2005 Risk Index, mortgage insurer PMI Mortgage Insurance Co., a unit of PMI Group Inc., calculates a 16.1% chance of an overall housing-price decline in the top 50 metropolitan markets during the next two years. That is down from the firm's autumn reading of an 18.6% chance of a price decline.
Risks have heightened substantially for homeowners in many of the major metropolitan areas along the East and West coasts. The culprit: continued housing-price increases that are making the average home increasingly less affordable to the average buyer.
That, PMI notes in its report, "signals a further misalignment of home prices with long-term economic fundamentals," increasing the likelihood that home prices will slide at some point to come back into line with what residents can afford.
The Boston-Cambridge-Quincy, Mass./N.H., metropolitan area tops the list as the region with the highest probability of experiencing a housing-price decline. The area scored a 533 on PMI's Risk Index, indicating a 53.3% probability of weaker home prices in the next two years.
That marks a big increase in risk for the New England hub. A year ago, Boston's probability for home-price declines stood at 23.3%. The area's problem "is that it has had strong home-price increases relative to poor income growth," says Marco Van Akkeren, an economist at PMI.
The PMI Risk Index ranges from one to 1,000, with a higher score indicating a greater likelihood of home-price declines. (A score of 100 represents a 10% chance of falling prices in the next two years.) PMI's proprietary calculus takes into account factors such as home-price appreciation, labor-market statistics and an index that shows how affordable a particular housing market is in relation to local incomes.
California's six major metro areas all rank among the top 10 markets most likely to see prices fall. San Diego, in particular, holds the distinction of also having the nation's most unaffordable housing market in terms of annual income. Based on per-capita income of $36,815 in the area, a 30-year mortgage on the median-priced home -- valued at more than $578,000 -- would consume about 90% of the average resident's income.
Away from the coasts, locales in and around Detroit; Minneapolis and St. Paul, Minn.; and Denver all ranked above the national average.
On the opposite end: Oklahoma City; Buffalo-Niagara Falls, N.Y.; and Pittsburgh all tied as cities least likely to experience a decline in home prices. They each scored 57, meaning they have a 5.7% chance of prices falling.
Results for the top 50 metropolitan statistical areas are available online at www.pmigroup.com/lenders/eret.html.
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