Cities in California and Florida dominate a list of areas where a private mortgage insurer expects home prices are the most likely to decline in the next two years.

Eleven of the 15 metropolitan statistical areas (MSAs) facing a 50 percent or greater chance of a price decline are in those two states, according to PMI Mortgage Insurance Co.’s latest Market Risk Index.

MSAs in Texas, Ohio, Indiana and Pennsylvania were among those with the lowest risk of price declines, PMI said, with less than a 10 percent chance of lower prices in the next two years.

PMI said it has changed the way it calculates the index, giving additional weight to recent price volatility and taking into account the use of adjustable-rate mortgages. The index also looks at trends in appreciation, unemployment, interest rates and affordability.

The list of top 50 MSAs was also updated to reflect demographic changes, with Memphis, Tenn., and New Orleans, La., removed to make room for two Florida MSAs, Jacksonville and West Palm Beach.

The markets with the greatest risk of decline share a history of price volatility — rapidly rising rates of price appreciation above the long-term average, followed by a recent sharp slowdown in the rate of appreciation, said Mark Milner, PMI Mortgage Insurance’s chief risk officer.

“Markets with a history of volatility are more likely to see price declines in the future, Milner said in a press release accompanying the release of the index. “MSAs with a history of low to moderate rates of volatility in house-price appreciation have a lower risk of price declines.”

The average risk score for the 50 largest MSAs as a whole was 346, which translates into a 34.6 percent chance that prices will be lower in two years.

Average scores by region were highest in the West (483), followed by the Northeast (292), South (246) and Midwest (163).

The 15 MSAs with a greater than 50 percent chance of price declines were:

  • Riverside-San Bernardino-Ontario, Calif. (652)
  • Phoenix-Mesa-Scottsdale, Ariz. (646)
  • Las Vegas-Paradise, Nev. (614)
  • West Palm Beach-Boca Raton-Boynton Beach, Fla. (607)
  • Los Angeles-Long Beach-Glendale, Calif. (586)
  • Santa Ana-Anaheim-Irvine, Calif. (577)
  • Oakland-Fremont-Hayward, Calif. (572)
  • Orlando-Kissimmee, Fla. (563)
  • Sacramento-Arden-Arcade-Roseville, Calif. (560)
  • San Diego-Carlsbad-San Marcos, Calif. (555)
  • Ft. Lauderdale-Pompano Beach-Deerfield Beach, Fla. (542)
  • Miami-Miami Beach-Kendall, Fla. (524)
  • Tampa-St. Petersburg-Clearwater, Fla. (506)
  • Boston-Quincy, Mass. (501)
  • Washington D.C.-Arlington-Alexandria, Va. (500)

“All 15 of the MSAs in (the highest risk groups) have a common history of several years of rapidly rising rates of price appreciation, coincident with substantial declines in affordability, followed by a sharp decrease in the rate of price appreciation,” PMI analysts said in their overview of the index.

Price appreciation in the 15 highest risk MSAs averaged 22.7 percent during the first quarter of 2006, but fell to 3.1 percent in the first quarter of 2007 — a “deceleration” of 19.6 percent.

Phoenix saw the biggest drop in the rate of appreciation, from 37.3 percent in the first quarter of 2006 to 4.52 percent in the same quarter a year later. In-migration from California has slowed, PMI noted, reducing upward pressure on home prices even as affordability continues to drop.

The higher-risk MSAs had much lower affordability scores — 66.7 on average, compared with 123.79 for the seven MSAs with less than a 10 percent chance of a price decline. Scores exceeding 100 indicate homes have become more affordable, while scores below 100 mean they are less affordable.

MSAs with the lowest affordability scores were Riverside (57.2), Miami (57.2), Los Angeles (59.5), Ft. Lauderdale (60.8), and Santa Ana (63.2). All were all categorized in the two highest risk groups.

Affordability remains “extremely challenging” in California after a prolonged period of rapid price appreciation, despite the fact that the Oakland, Sacramento and San Diego MSAs registered price declines, PMI reported. Current low levels of unemployment continue to support California’s housing market, PMI concluded, but weakening housing demand and prices have resulted in high risk scores.

The seven MSAs with less than a 10 percent chance of price declines were:

  • Pittsburgh, Pa. (64)
  • Ft. Worth-Arlington, Texas (74)
  • Dallas-Plano-Irving, Texas (75)
  • Houston-Sugar Land-Baytown, Texas (79)
  • Indianapolis-Carmel, Ill. (84)
  • Columbus, Ohio (93)
  • Cincinnati-Middletown, Ohio (97)

Low-risk MSAs shared low rates of price volatility and appreciation, PMI said, plus affordable housing prices and low unemployment.

The MSAs the best affordability scores were Pittsburgh (128.6), Indianapolis (128), Ft. Worth (126.4), Dallas (123.6) and Cincinnati (121.9). All were ranked in the group with the lowest risk of price decline.

These low risk areas tend to be concentrated in the Midwest and Southern states, although some MSAs in those regions have a 20 percent or better chance of prices declines in the next two years. Midwestern and Southern MSAs at risk of price decline included Detroit-Livonia-Dearborn, Mich. (284), Philadelphia, Pa. (237), Warren-Troy-Farmington Hills, Mich. (236), and Atlanta-Sandy Springs-Marietta, Ga. (212).

While volatility has been fairly low in the industrial Midwest, high and increasing rates of unemployment in those MSAs caused by continued layoffs in the auto and related industries are driving these risk scores higher.

But despite that fact that Detroit and Warren have seen negative price appreciation, those MSAs enjoy lower risk scores than some more volatile markets where prices are still on the rise.

The longer price growth stays in negative territory, PMI analysts said, the lower the probability of future price declines.

“Simply put, prices can’t fall forever,” PMI’s report said. “At some point the market will revert to its mean positive growth rate, resulting in a reduced probability of further declines.”

Many MSAs in the Northeast and Northwest fall into the middle of the risk spectrum, in part because price appreciation has already slowed or reversed.

The Cambridge-Newton-Framingham, Mass., MSA, for example, has seen the rate of appreciation decline to -0.5 percent. Although the affordability index remains low at 90.7, PMI puts the MSA’s risk of price decline at just 33.6 percent.

Other MSAs in the Northeast where price appreciation has slowed but not reversed have relatively low risk scores because prices have been less volatile. Those MSAs include Nassau-Suffolk, N.Y. (445), Providence-New Bedford-Fall River, R.I. (397), Baltimore-Towson, Md. ((400), Edison, N.J. (362) and Newark-Union, N.J. (314).

In the Northwest and Rocky Mountain states, some MSAs remain more affordable than California or Florida. But continued price appreciation and volatility pushed MSAs like Seattle and Portland into the mid-tier of risk. The Seattle-Bellevue-Everett, Wash., MSA scored 343 on the risk index, which corresponds to a 34.3 percent chance of a price decline in the next two years. The MSA encompassing Portland and Beaverton, Ore., and Vancouver, Wash., saw price appreciation of 11 percent in the first quarter, helping push its risk index score to 389.

***

Send tips or a Letter to the Editor to matt@inman.com, or call (510) 658-9252, ext. 150.

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