News: US market showing signs of slowing

Forty-eight of the USA's 50 largest metropolitan statistical areas (MSAs) face a greater risk of declining home prices this quarter, according to PMI Mortgage Insurance Co.'s Spring U.S. Market Risk Index.

U.S. Market Risk Index scores increased for all of the top 50 MSAs except Chicago whose score decreased one point. New Orleans was not scored this quarter due to the catastrophic impact of Hurricane Katrina.

Fourteen of the top 50 MSAs now have risk scores above 500, meaning they face a 50 percent or greater risk of home price declines in the next two years, up from 11 MSAs last quarter. The average score has increased from 261 last quarter to 287. The biggest change was in Minneapolis, MN, which gained 90 points, taking it to a score of 350 and up two spots in the ranking to No. 19.

Prices still rising, just more slowly...

Continuing a trend that began last quarter, the Risk Index also registered deceleration in the pace of home price appreciation.

Appreciation slowed in 21 of the 50 largest MSAs. The biggest changes were in Las Vegas where appreciation slowed by 18 percentage points and San Diego where it slowed by 13 percentage points.  With year over year rates of 14.4 percent and 10.5 percent respectively, however, appreciation remained higher than historical averages in both areas.

But it wasn't all bad news.  Twenty-six of the of the 50 largest MSAs saw double-digit appreciation, led by Phoenix, AZ at 33.4 percent.

... Causing affordability problems...

According to PMI's Affordability Index, affordability decreased in all 50 of the nation's largest MSAs in the fourth quarter of 2005.

There are now eight MSAs with Affordability Index scores below 70, which PMI considers a threshold for vulnerability to an economic shock, compared to just two MSAs last quarter. Three more MSAs have Affordability Index scores between 70 and 75.

The lower Affordability Index numbers reflect the increase in interest rates in the fourth quarter of 2005, along with the fact that in many areas home price increases continue to outstrip incomes.

"The most significant change we saw this quarter was in affordability," said Mark Milner, Chief Risk Officer of PMI Mortgage Insurance Co. "With continued double-digit appreciation in many areas coinciding with higher interest rates, affordability is becoming more of a challenge for American homebuyers."

The economy to the rescue?

However, PMI predict that the continued strength of the national and local economies will act as a buffer, ensuring any cooling in the housing market is gradual.

Milner said: "The risk of price declines has increased somewhat, but the national and local economies remain strong, which should support a gradual return to an economic climate characterized by slow, steady appreciation."

Of the top 50 MSAs all but five - Newark, NJ, Detroit, MI, Warren, MI, Cleveland, OH, and Indianapolis, IN - saw employment growth. Unemployment remains below 5 percent in all but 14 of the top 50 MSAs.

Key findings

  • In addition to Minneapolis, MN, MSAs that saw significant increases in risk were Virginia Beach, VA (+65 points to 274), Baltimore, MD (+62 to 279), Newark, NJ, (+61 to 427), New York, NY (+58 to 506), and Washington, D.C., (+56 to 401)
  • Risk is still clearly focused on the coasts
  • There are now eight areas with Affordability Index scores below the vulnerability threshold of 70: San Diego, Santa Ana, Riverside, Sacramento, Oakland, and Los Angeles, CA, and Fort Lauderdale and Miami, FL. Long Island (Nassau-Suffolk), NY, San Jose, CA, and Tampa, FL are also considered potentially vulnerable with scores between 70 and 75.
  • While slowing, appreciation remains high by historical standards. Phoenix, AZ, Orlando, Fort Lauderdale, Miami, and Tampa, FL, Washington, D.C., Virginia Beach, VA, and Los Angeles, CA saw year-over-year appreciation of more than 20 percent.
  • The five least risky areas among the top 50 MSAs are San Antonio, TX, Cincinnati, OH, Indianapolis, IN, Memphis, TN, and Pittsburgh, PA.

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