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| On Home Price Risk, Markets Are Far From Equal |
| Written by Jonathan Smoke | |
| 01.18.2008 | |
Discuss this article on the forums. (0 posts) “We” lived through a housing bubble in the first half of this decade. Or, better put, those of us who lived in markets that had home price appreciation rates that far exceeded what should have happened lived through a bubble. The rest of us experienced fairly normal and expected price appreciation.Likewise, “we” are now living through a housing bust. Based on what I continue to see and hear through the financial media and from respected national economists we can all look forward to at least another year, if not more, of home price declines. Realistically, barring a complete national economic collapse, our fortunes are not so tethered together such that every market will decline. After all, less than a quarter of the country’s markets experienced the boom, so why should they all have to “correct” if there’s nothing in need of correction? If there’s any justice in this world, what did not go up should not come down. Considering all of the noise and flatulence on the subject, I was beginning to feel lonely in this “optimistic” view that not all markets are destined to see home values further erode. Today I thankfully read the new Winter 2008 Economic & Real Estate Trends report from The PMI Group, the mortgage insurance company. PMI publishes a quarterly home price risk index for 381 markets in the country and summarizes the top 50 MSAs in the Trends report. As the following map illustrates, the vast majority of markets have less than a 10% risk of experiencing home price declines over the next two years, while many, mostly former bubble markets have a 40% or better chance of home price decline. The Trends report has a fine commentary from David W. Berson, the Chief Economist and Strategist of The PMI Group. The focus of the report is mostly on the top 50 MSAs, which happen to have a high representation of the high risk and former bubble markets, so Berson’s conclusion is somber but still notes that the majority of markets have low home price risk: “There was a sharp increase in the risk of declining home prices as measured by PMI’s U.S. Market Risk Index in the third quarter, especially for the largest MSAs and also for MSAs in California, Florida, Nevada, and Arizona. While some of this increase in house price risk stemmed from our enhanced model, it also reflects in many cases a significant deterioration of the housing market in the third quarter. There is a high likelihood that home prices will be lower in many of these MSAs two years from now than they are today. More optimistically, the number of MSAs with relatively low home price risk continues to outnumber those with relatively high risk—but that could change if the economy and financial markets worsen further.”
So, unless your market is a coastal market that experienced a bubble, is in the parts of Arizona, Nevada or Utah that had bubbles, or is in one of the Midwest markets that are hurting economically, you shouldn’t have much to worry about unless you start believing the “national” story that we are all doomed to the same forecast. 
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