Housing markets that didn’t experience steep run-ups in prices during the housing boom are starting to show a reduced risk of price declines in the next two years, according to a risk index published by PMI Mortgage Insurance Co.

The chance that housing prices will be lower in two years declined in 32 of the 50 largest U.S. housing markets during the fourth quarter, PMI said. That’s an abrupt turnaround from the third quarter, when PMI said the risk of price declines increased in 39 of the 50 largest markets.

But PMI’s Spring 2008 U.S. Market Risk Index also showed a greater than 50 percent chance of price declines in 14 of the nation’s 50 largest housing markets, up from 13 in the previous quarter.

The index shows risk is beginning to "diverge along two distinctly different paths," PMI analysts said.

Risks continue to increase in states where growth in house prices "significantly exceeded" historical norms during the housing boom, including markets in Florida, California, Arizona and Nevada.

But in areas of the country where prices grew at a "more sustainable rate," the risk that prices will fall in the next two years began to decline slightly during the fourth quarter.

PMI’s Market Risk Index measures the likelihood of home price declines in two years in 381 metropolitan statistical areas (MSAs). The index uses economic, housing, and mortgage market factors including home price appreciation, employment, affordability, excess housing supply, interest rates, and foreclosure activity.

Falling home prices may reduce the risk of future price declines, but PMI said its models indicate that national declines in home prices are only about one-third to one-half over.

"We still expect the housing market to stabilize sometime in the second half of this year in response to expansionary monetary and fiscal policy, while builders continue to reduce the number of single-family housing starts into 2009," PMI analysts said. "If this occurs, then the inventory of unsold homes should peak later this year and fall throughout next year. As a result, the downward pressure on national house prices should begin to abate in the second half of 2008. It is likely, however, that prices will continue declining well into 2009, as inventories will still be large (even if falling)."

PMI projects that the Standard & Poor’s/Case-Shiller index will fall by around 20 percent from its peak in mid-2006, while an index published by the Office of Federal Housing Enterprise Oversight (OFHEO) that is based on conforming mortgages will drop by around 8 percent from its peak in mid-2007.

Those indexes reflect national statistics, and prices may fall more in some markets and less in others. Home prices continue to appreciate or hold steady in some markets where housing demand is greater than supply.

Of the 14 top 50 markets where PMI estimates there is a greater than even chance that prices will be lower in two years, seven are in California and five are in Florida, while Nevada and Arizona each have one.

PMI determined that the greatest increase in risk of price declines occurred in Florida, with Orlando experiencing the largest increase in the state. The risk of price declines in Orlando rose by nearly 10 percent, to 85 percent.

The risk index in Miami-Miami Beach-Kendall MSA was lower than the state’s other large markets, with a 61 percent chance of price declines, but the risk outlook for Miami remains negative because of a falloff in investor demand and a continued increase in new housing units that’s produced a record buildup of unsold inventory, PMI analysts said.

Although the risk of price declines in California markets continued to rise, the rate of increase was "significantly below" the third quarter. For the eight California MSAs in the top 50, the average increase in risk score was 2.1 percent, compared to a 19 percent increase between the third and fourth quarters.

Among the top 50 MSAs, the 14 PMI determined face a greater than 50 percent chance of price declines in the next two years were:

  • Riverside-San Bernardino-Ontario, Calif. (93 percent)
  • Las Vegas-Paradise, Nev. (92 percent)
  • Orlando-Kissimmee, Fla. (85 percent)
  • Ft. Lauderdale-Pompano Beach-Deerfield Beach, Fla. (84 percent)
  • Phoenix-Mesa-Scottsdale, Ariz. (84 percent)
  • Santa Ana-Anaheim-Irvine, Calif. (81 percent)
  • West Palm Beach-Boca Raton-Boynton Beach, Fla. (80 percent)
  • Sacramento-Arden-Arcade-Roseville, Calif. (78 percent)
  • Tampa-St. Petersburg-Clearwater, Fla. (78 percent)
  • Los Angeles-Long Beach-Glendale, Calif. (77 percent)
  • San Diego-Carlsbad-San Marcos, Calif. (73 percent)
  • Oakland-Fremont-Hayward, Calif. (64 percent)
  • Miami-Miami Beach-Kendall, Fla. (61 percent)
  • San Jose-Sunnyvale-Santa Clara, Calif. (51 percent)
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