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| Like the Weather, Prices Are Determined Locally |
| Written by Jonathan Smoke | |
| 08.31.2007 | |
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Discuss this article on the forums. (0 posts) A front-page article in today’s Wall Street Journal reported findings by the Mortgage Bankers Association. It said that mortgages on properties not occupied by an owner -- such as investment homes -- account for between 21% and 32% of defaults on prime-quality loans in several states where speculation during the boom was the most active.  This makes sense. Despite credit quality, if investors put little money down and now because of static or falling prices have limited or negative equity, the easiest thing for them to do is to walk away. Investment activity did not happen equally in every market. In fact, only a few markets enjoyed the benefit of the investment ride up.Bill Russell and I have been working on an analysis of housing, economic and consumer data to look for ways to better understand housing risk, especially as it relates to the current credit crisis. One of the components we have built provides visibility into the likelihood of whether a market area will suffer from housing price declines over the next several years. Think of it like a weather forecast. To illustrate the point that location matters most, here’s our housing forecast for rain (price declines) for the 361 metropolitan statistical areas in the 50 states: 67 markets have a greater than 80% chance of seeing housing price declines between now and the end of 2008. That’s only 19% of the markets in the country, but in that group are some large markets, such as Boston, Charlotte, Sacramento, Phoenix and Denver.
On the flipside, 137 markets have less than a 20% chance of rain (housing price declines). Or put more positively, 39% of the markets in the U.S. look to have sunny days on the home prices front, at least through the end of 2008. And that group isn’t just made up of smaller markets. The sunny forecast covers major cities like Houston, Austin, Salt Lake City, Raleigh-Durham, Charleston, Seattle and San Francisco.In between these two extremes are the remaining 157 markets, which can expect at least partly cloudy conditions. So it’s all about location. If you don’t want to pack an umbrella, look to markets headed for sunnier times. If you are stuck in markets suffering ill effects of underlying economics or excess supply pressure, get out your poncho and rain boots. We’ll share more details with our readers if we see that enough of you are interested. One way you can show us your interest and share your own viewpoints is to post comments to this article. You can also send us feedback and additional suggestions for future posts. 
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