"No one should be surprised by the slowdown we're seeing," said Mark F. Milner, Chief Risk Officer of PMI Mortgage Insurance Co. "Over the past five years home prices appreciated much faster than incomes, and that can't continue forever. But there are tried and true strategies for surviving the changing market. For companies, those with nationally diversified portfolios should be in good shape to weather the changes we're seeing. For individuals, it's important to remember that home ownership is a long-term investment, not a short-term market trade."
While year-over-year appreciation remained in the double digits in 20 MSAs and topped 20 percent in four -- Phoenix, AZ and Orlando, Miami, and Tampa, FL -- the rate of appreciation slowed in 41 of the 50 largest MSAs. In 13 areas, appreciation dropped below the historical norm of roughly 4 to 6 percent. Detroit recorded the only year-over-year decline among the top 50 MSAs, of 0.61 percent.
The risk of price declines continues to be concentrated in California and along the Eastern Seaboard. Of the 18 MSAs facing a greater than 50 percent chance of a price decline, eight are in California (San Diego, Sacramento, Oakland, Santa Ana, Riverside, Los Angeles, San Jose, and San Francisco) and eight are in the northeast (Nassau-Suffolk and New York, NY, Boston and Cambridge, MA, Providence, RI, Edison and Newark, NJ, and Washington, DC). The remaining two are Fort Lauderdale, FL and Las Vegas, NV.
In addition to the PMI U.S. Market Risk Index showing the risk of price declines, PMI's Fall 2006 Economic and Real Estate Trends(SM) (ERET) examines major regional trends, as well as statistics commonly used to judge the housing market's current health and future prospects.
According to PMI's Affordability Index(SM), a proprietary index that is one component of the Risk Index, affordability dropped in all 50 MSAs, in part because interest rates hit a high of about 6.78 percent during the second quarter, compared to 6.47 percent late in the third quarter. Twelve MSAs now have Affordability Index scores below 70, a threshold below which an area is particularly vulnerable to economic shock. With a score of 56.78, Fort Lauderdale, FL, is again the least affordable area among the 50 largest MSAs.
Milner commented, "Over the past five years, house prices in the United States have appreciated more than 56 percent, on average, and much more in some areas. In the same time period, incomes increased just 25 percent. That's why affordability has decreased so much in many areas. Going forward, house prices and incomes need to come back into balance so that more Americans can afford to buy homes without resorting to loans that expose them to interest rate risk and the risk of payment shock."
In most areas, the risk of price declines continues to be balanced by strong economic fundamentals. With the exception of the upper Midwest, unemployment remains low in most of the country and job growth is positive. Of the top 50 MSAs all but four -- Detroit and Warren, MI, Newark, NJ, and New Orleans, LA -- saw employment growth. Las Vegas led the nation in employment growth at 5.32 percent over the past year, followed closely by Phoenix, AZ at 5.20 percent. In the upper Midwest, rising unemployment is putting pressure on prices, resulting in Detroit's year-over-year decline.
