PMI Mortgage released its Summer 2007 U.S. Market Risk Index(SM), which ranks the nation's 50 largest metropolitan statistical areas (MSAs) according to the likelihood that home prices will be lower in two years. The enhanced index, which gives additional weight to an area's recent price volatility, shows a shift in risk toward Florida and California, as well as certain areas of the southwest. For the 50 largest MSAs, the average score, weighted by population, was 346, translating into a 34.6 percent chance that prices will be lower in two years.

"We're very pleased to introduce our updated Risk Index model," said Mark F. Milner, Chief Risk Officer of PMI Mortgage Insurance Co. "Our new model gives more weight to the recent volatility of an area's price movements and is better suited for the vastly different market we are in today. Our prior model, in contrast, was tuned to the rapidly appreciating market we were in from 2002 to 2006."

An additional feature of the enhanced index is the introduction of risk ranks, which group areas with consistent characteristics together. Riverside, CA, Phoenix, AZ, Las Vegas, NV, and West Palm Beach, FL rank highest on the index, with a 60 percent or greater chance that home prices will be lower in two years. Five of the 11 MSAs facing a greater than 50 percent chance of a price decline are in California (Los Angeles, Santa Ana, Oakland, Sacramento, and San Diego) and four are in Florida (Orlando, Fort Lauderdale, Miami, and Tampa); the other two are Boston, MA and Washington, D.C.

Texas, Ohio, Indiana, and Pennsylvania MSAs constitute the lowest ranked group-those facing a less than 10 percent chance of lower prices. "What the markets with the greatest risk of decline have in common is 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," Milner explained. "Markets with a history of volatility are more likely to see price declines in the future. MSAs with a history of low to moderate rates of volatility in house price appreciation have a lower risk of price declines."

According to information obtained from the Office of Federal Housing Enterprise Oversight, the rate of price appreciation slowed in all but five of the 50 largest MSAs, and only five saw appreciation in the double digits in the first quarter of 2007, down from 26 in the first quarter of 2006. Nine MSAs-West Palm Beach, FL, Oakland, Sacramento, and San Diego, CA, Boston and Cambridge, MA, Detroit and neighboring Warren, MI, and Cleveland, OH-saw slight year-over-year price declines. In most areas, the risk of price declines continues to be balanced by strong economic fundamentals, including low unemployment.

"The market's changing tide doesn't mean it is a bad time to buy or own a house, but it is a reminder that homeownership is a long-term investment," said Milner. "For buyers, in many areas it's a much friendlier market than it was even a year ago, but you need to choose your mortgage product carefully. If you already own, you need to take the long view and have realistic expectations about how much your property may appreciate. Building equity in a home is still a great way to build wealth over the long term."