Declining home prices boosted affordability during the second quarter, reducing the risk of price declines in 28 of the 50 largest metropolitan areas, according to an analysis by PMI Mortgage Insurance Co.

PMI said its U.S. Market Risk Index — which takes into account economic factors like home-price appreciation and volatility, affordability and employment — fell for the first time in 2 1/2 years during the second quarter.

While that’s an encouraging sign that housing markets are beginning to correct, it’s not evidence that they’ve hit bottom. Scores in many areas remain elevated, and risk remains high nationwide, said Mark Milner, PMI’s chief risk officer.

“We have seen a significant slowdown in price appreciation nationwide, and appreciation has gone negative in some areas,” Milner said. “That’s improved affordability, which is being reflected in the risk scores. But risk is still high and it’s way too early to say we’re at an inflection point.”

The average risk score for the 50 largest metropolitan statistical areas (MSAs) remained near an all-time high of 329, which translates into a projected 32.9 percent chance of price decline in those areas during the next two years. That’s down from 346 during the first quarter (see Inman News story), but still well above the national average of 289 for all 381 MSAs studied.

During the second quarter, 11 MSAs had risk scores of 500 or above, correlating to an estimated 50 percent or greater chance of price declines in the next two years, compared with 15 MSAs in the first quarter. The 11 MSAs were:

  • Riverside-San Bernardino-Ontario, Calif. (608)
  • Las Vegas-Paradise, Nev. (587)
  • Santa Ana-Anaheim-Irvine, Calif. (579)
  • Phoenix-Mesa-Scottsdale, Ariz. (575)
  • Los Angeles-Long Beach-Glendale, Calif. (536)
  • West Palm Beach-Boca Raton-Boynton Beach, Fla. (532)
  • Sacramento-Arden-Arcade-Roseville, Calif. (522)
  • San Diego-Carlsbad-San Marcos, Calif. (521)
  • Oakland-Fremont-Hayward, Calif. (516)
  • Ft. Lauderdale-Pompano Beach-Deerfield Beach, Fla. (507)
  • Orlando-Kissimmee, Fla. (506)

Dropping off the list of MSAs with risk scores of 500 or higher were Miami-Miami Beach-Kendall, Fla. (466), Tampa-St. Petersburg-Clearwater, Fla. (462), Boston-Quincy, Mass. (400) and Washington, D.C.-Arlington-Alexandria, Va. (439).

Boston, Phoenix and West Palm Beach, Fla., saw the largest quarter-to-quarter drop in risk scores, although all three cities remained well above the national average. Boston has seen price declines in four of the last five quarters, helping the city shave 101 points from its risk score, while West Palm Beach (down 75 points) and Phoenix (down 71 points) saw improvements not only in housing affordability, but employment.

Housing affordability, which improves when income growth outpaces home-price appreciation, showed gains in 297 MSAs, or 78 percent of all of those studied. In the top 50 MSAs, all but two saw improvements in affordability. Some areas, such as Phoenix, saw affordability gains even as prices appreciated modestly during the second quarter, because income growth outpaced home-price appreciation.

The MSAs that saw the largest improvements in affordability were in areas that were already at low to moderate risk of price declines. On average, MSAs in the Western states scored the highest for risk (451), followed by the Northeast (273) and the South (243). MSAs in the Midwest had the lowest average risk score (187).

Risk scores are generally low in the Midwest because the region did not experience the rapid and sustained price appreciation places such as California, Nevada and Florida saw during the boom years, said LaVaughn Henry, PMI’s director of economic analysis.

“Our model is fundamentally based on price volatility, and much of the Midwest and areas of the South have had low price volatility, and didn’t participate in the rise in prices we had” during the boom, Henry said, attributing much of the rise in delinquencies and foreclosures in the Midwest to increased unemployment.

While PMI found weakening employment was not a significant issue for most of the 50 largest MSAs, nine of the 25 MSAs with the largest increases in unemployment were in Ohio (seven of the top 25 MSAs) and Michigan (two). California (seven) and Louisiana (five) also had a large proportion of the 25 MSAs experiencing the largest increases in unemployment.

Home-price appreciation, which peaked in the second quarter of 2005, has been “decelerating” in seven in the last eight quarters. In other words, while prices are still going up on average, they are not going up as fast. Homes with conforming mortgages appreciated at a rate of 3.2 percent per year during the second quarter, compared with 4.5 percent in the first quarter.

Prices were actually falling in an increasing number of MSAs during the second quarter, with 28 percent of the 50 largest MSAs seeing price declines, compared with 16 percent of the remaining 331 MSAs.

The fact that large MSAs were more likely to experience price declines in the second quarter — a reversal of past trends — indicates that price declines are starting to take hold even in more populated areas where prices and employment are typically more stable, the report concluded.

In an attempt to help prospective home buyers decide whether it’s a good time to buy, PMI’s fall 2007 Economic Real Estate Trends report also looked at how those who bought homes during the three worst downturns in the last 25 years fared.

That analysis, which assumed the average homeowner made a 20 percent down payment, found that home ownership produced a positive return on investment 98.9 percent of the time over 10 years. In the worst of the three scenarios studied — Houston’s housing downturn during the 1980s following layoffs in the oil industry — it took homeowners who bought at the peak of the cycle 15 years to show a positive return.

Milner said the analysis demonstrates that “home ownership is a good way to build long-term wealth, and that (home buyers) shouldn’t panic when we are going through a phase like that.”

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