Kristin Campbell | 09.19.06

Rapidly slowing appreciation and declining affordability contributed to an increase in the risk of home price declines across the country, according to the PMI U.S. Market Risk Index released today.

The fall index scores increased for all of the nation’s 50 largest metropolitan statistical areas and showed a 32.8 percent chance that home prices will decline in the next two years. However, strong economic fundamentals continue to underpin many cities. The index also showed that 18 MSAs have at least a 50 percent change of home price decline, up from 13 MSAs last quarter, the report said.

While annual appreciation remained in the double digits in 20 MSAs and topped 20 percent in four – Phoenix, Orlando, Miami and Tampa, — the rate of appreciation slowed in 41 of the 50 largest MSAs. In 13 areas, appreciation dropped below the historical norm of roughly four to six percent. Detroit recorded the only year-over-year decline, 0.61 percent, among the top 50 MSAs.

The risk of price declines continues to be concentrated in California and along the Eastern Seaboard, the report shows. California is home to eight of the 18 MSAs facing a greater than 50 percent chance of a price decline (San Diego, Sacramento, Oakland, Santa Ana, Riverside, Los Angeles, San Jose, and San Francisco). The Northeast is also home to eight (Nassau-Suffolk, New York, Boston, Cambridge, Providence, Edison, Newark, and Washington, DC). The remaining two are Fort Lauderdale and Las Vegas.

However, in most areas, the risk of price declines continues to be balanced by strong economic fundamentals, PMI’s Fall 2006 Economic and Real Estate Trends report found. Unemployment remains low in most of the country and job growth is positive, with the exception of the upper Midwest. All but four of the top 50 MSAs (Detroit and Warren, Mich., Newark and New Orleans) saw employment growth. Las Vegas led the nation in employment growth at 5.32 percent over the past year, followed closely by Phoenix at 5.20 percent. In the upper Midwest, rising unemployment is putting pressure on prices, resulting in Detroit’s year-over-year decline.

The PMI U.S. Market Risk Index, published quarterly, is based on the House Price Index from the Office of Federal Housing Enterprise Oversight, labor market statistics from the Bureau of Labor Statistics, and the PMI Affordability Index, which uses local median household income, home price appreciation, and the price of a conventional mortgage to calculate the local share of mortgage payment to income relative to its baseline year of 1995.