North Suburban Chicago Real Estate Blog

NEW STUDY PINPOINTS TOP PLACES WHERE REAL-ESTATE PRICES MAY FALL

Some of the nation's hottest housing markets are cooling, but the strength of the economy is balancing the risk of home-price declines, according to PMI Mortgage Insurance Co., which released its U.S. Market Risk Index on Tuesday.

The average risk score for the country's largest metropolitan statistical areas was 288 in the first quarter, one point up from the last quarter and 70 points up from a year ago. During the quarter, 25 metropolitan areas saw increases in risk, while 20 saw decreases.

The index uses data from the Office of Federal Housing Enterprise Oversight, the Bureau of Labor Statistics and the PMI affordability index to assign 50 of the country's largest metropolitan areas a score from one to 1,000.

A score of 100 means the area has a 10% chance its home prices will decline over the next two years. Higher scores mean a greater risk of home-price declines in the future. The New Orleans area was left out of the quarter's results due to the impact of Hurricane Katrina.

"This quarter's data signals that in many areas the expansion of the housing balloon has slowed substantially," said Mark Milner, chief risk officer of PMI Mortgage Insurance Co., in a statement. The company is a subsidiary of the PMI Group Inc.

"The Risk Index also shows that slowing price appreciation is balanced by underlying economic strength. In the absence of an unexpected economic shock, this makes a gradual cooling of the market the most likely outcome," Milner added.

Thirteen metropolitan areas had risk scores higher than 500 -- indicating a 50% or greater risk of home-price declines in the next two years. The San Diego-Carlsbad-San Marcos, Calif., area had the highest risk, with a rating of 599. Newark, N.J., and Miami both had 32-point increases in risk over the quarter, landing at 459 and 359, respectively.

Thirty-four markets experienced decelerating home prices over the year, with Las Vegas leading the group. Appreciation slowed to 14.5% in Las Vegas, down from 30.1% a year ago.

"We'd reached a point where prices had gotten too far away from economic fundamentals," according to Milner. "A return to a more normalized appreciation climate is a natural outcome."

Appreciation may be slowing in a number of markets, but it is still positive in the country's largest metropolitan areas -- with half of them maintaining appreciation rates in the double digits.

Other findings from the report include the following:

Risk is concentrated along the coasts: Eight of the 13 highest risk areas are located in California and five are in the Northeast.

Six markets saw appreciation of more than 20% over the year. Phoenix saw appreciation of 31.1%; Orlando, Fla., saw appreciation of 27.7%; Fort Lauderdale, Fla., saw appreciation of 25.7% and Miami saw appreciation of 24.7%.

Four higher-risk markets saw appreciation drop into the single digits over the year. San Diego experienced 7.7% appreciation; Boston experienced 5.7% appreciation; Providence, R.I., experienced 9.5% appreciation, and Cambridge, Mass., experienced 5.2% appreciation.

Affordability decreased in more than half of the largest metropolitan areas during the first quarter of 2006. Affordability increased slightly in 19 markets due to slower price growth; five of the markets were in Texas and six were in the Midwest.

All but four of the largest metropolitan areas -- Detroit, Milwaukee, Cleveland and Warren, Mich. -- have seen recent employment growth. Las Vegas led the country in employment growth at 6.23% over the year, followed by Phoenix with 6.02%.

Below are the risk scores for the top 50 metropolitan areas, minus New Orleans: