Forty-eight of the nation’s 50 largest metropolitan statistical areas face a greater risk of declining home prices this quarter, but the continued strength of national and local economies suggests that in the absence of an economic shock, the once red-hot housing market will cool gradually, an industry report found today.

House-price appreciation has slowed in nearly half of the metropolitan statistical areas compared with last quarter, according to PMI Mortgage Insurance Co.’s latest risk index.

Affordability remains a problem with eight metro areas registering affordability levels considered low by historical standards, due to appreciation and higher interest rates.

In a separate study of the past value of home ownership, PMI found that between 1986 and 2005, owning a home in one of the largest metro areas resulted in a positive return on investment, with the chance of a positive return increasing the longer the home was owned. The study was based on the home-price index tracked by the Office of Federal Housing Enterprise Oversight.

“What we found was that across the nation’s 50 largest MSAs, owning a home for 10 years or more resulted in a positive return in 100 percent of the cases,” said Mark Milner, chief risk officer of PMI Mortgage Insurance Co. “This dropped to 95 percent with a seven-year ownership term and to 92 percent with a five-year ownership term — still a pretty impressive rate. Home ownership clearly can be an important strategy for building wealth over the long term.”

PMI’s risk index scores increased for all of the top 50 metro areas except Chicago, whose score decreased one point. New Orleans was not scored this quarter due to the impact of Hurricane Katrina, the company said.

Fourteen of the top 50 metro areas now have risk scores above 500, meaning they face a 50 percent or greater risk of home-price declines in the next two years, up from 11 metro areas last quarter, according to the index. The average score has increased from 261 last quarter to 287. The biggest change was in Minneapolis, which gained 90 points, taking it to a score of 350 and up two spots in the ranking to number 19.

“The risk of price declines has increased somewhat, but the national and local economies remain strong, which should support a gradual return to an economic climate characterized by slow, steady appreciation,” Milner said. Of the top 50 metro areas all but five — Newark, N.J.; Detroit; Warren, Mich.; Cleveland, Ohio; and Indianapolis — saw employment growth.

Unemployment remains below 5 percent in all but 14 of the top 50 metro areas, according to the index.

“The most significant change we saw this quarter was in affordability,” Milner said. “With continued double-digit appreciation in many areas coinciding with higher interest rates, affordability is becoming more of a challenge for American home buyers.”

According to PMI’s affordability index, affordability decreased in all 50 of the nation’s largest metro areas in the fourth quarter of 2005. There are now eight metro statistical areas with affordability index scores below 70, which PMI considers a threshold for vulnerability to an economic shock, compared to just two metros last quarter. Three more have affordability index scores between 70 and 75. The lower affordability index numbers reflect the increase in interest rates in the fourth quarter of 2005, along with the fact that in many areas home-price increases continue to outstrip incomes.

Continuing a trend that began last quarter, the risk index also registered deceleration in the pace of home-price appreciation.

Appreciation slowed in 21 of the 50 largest metro statistical areas. The biggest changes were in Las Vegas, where appreciation slowed by 18 percentage points, and San Diego, where it slowed by 13 percentage points. With year-over-year rates of 14.4 percent and 10.5 percent, respectively, however, appreciation remained higher than historical averages in both areas. Twenty-six of the top 50 areas saw double-digit appreciation, led by Phoenix at 33.4 percent.

Other risk index trends include:

  • In addition to Minneapolis, metro areas that saw significant increases in risk were Virginia Beach, Va. (+65 points to 274); Baltimore, Md. (+62 to 279); Newark, N.J. (+61 to 427); New York (+58 to 506); and Washington, D.C. (+56 to 401).

  • Riverside and Oakland, Calif., traded places, making Riverside number 5 and Oakland number 7. San Francisco and San Jose, Calif., also traded places, making San Francisco number 10 and San Jose number 11. Other than that, the top 15 are the same as last quarter with risk still clearly focused on the coasts.

  • There are now eight areas with affordability index scores below the vulnerability threshold of 70: San Diego, Santa Ana, Riverside, Sacramento, Oakland, and Los Angeles, Calif., and Fort Lauderdale and Miami, Fla. Long Island (Nassau-Suffolk), N.Y., San Jose, Calif., and Tampa, Fla., are also considered potentially vulnerable with scores between 70 and 75.

  • While slowing, appreciation remains high by historical standards. Phoenix; Orlando, Fort Lauderdale, Miami, and Tampa, Fla.; Washington, D.C.; Virginia Beach, Va., and Los Angeles saw year-over-year appreciation of more than 20 percent.

  • The five least risky areas among the top 50 metro areas are San Antonio, Texas; Cincinnati, Ohio; Indianapolis, Ind.; Memphis, Tenn.; and Pittsburgh, Pa.

PMI Mortgage Insurance Co., a subsidiary of The PMI Group Inc., is a U.S. residential mortgage insurer, licensed in all 50 states, the District of Columbia, and Puerto Rico.

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