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Friday, July 4, 2008

We live in risky times...

From a recent real estate news feed comes this story - PMI Mortgage Insurance Co., the primary U.S. subsidiary of The PMI Group, Inc. (NYSE: PMI), today (7-1-2008) released its Summer 2008 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 U.S. Market Risk Index shows risk further diverged along two distinctly different paths during the first quarter of 2008, continuing a trend that began in the fourth quarter of 2007. In general, risk continued to intensify in many of the MSAs where home price growth had significantly exceeded historical norms during the housing boom, but continued to decline in many other areas across the country.

A complete copy of the Summer 2008 PMI ERET report and an appendix that provides data for all 381 U.S. MSAs is available at: http://www.pmi-us.com/eret. I have shown only the top 25 MSA below, which includes Detroit at number 24.

The highest risk of future price declines remains in Riverside-San Bernardino-Ontario, CA (95.5), followed by Fort Lauderdale-Pompano Beach-Deerfield Beach, FL (92.2), and West Palm Beach-Boca Raton-Boynton Beach, FL (91.9). The areas with the lowest risk of price declines are in Fort Worth-Arlington, TX, Dallas-Plano-Irving, TX, and Pittsburgh, PA, each at less than a 1 percent chance.

The risk of lower prices in two years declined in 35 of the nation's 50 largest MSAs, and among all 381 MSAs, 326 experienced a decline in risk. Among the top 50 MSAs, 16 ranked in the two highest risk categories, and among those, 15 were in California, Florida, Nevada, and Arizona. Risk of lower prices in two years is greater than 50 percent in all of these MSAs.

Risk scores translate directly into an estimated percentage risk that home prices will be lower in two years. The Summer 2008 Risk Index is based on first-quarter Office of Federal Housing Enterprise Oversight (OFHEO) data.


PMI Summer 2008 PMI U.S. Market Risk Index

Risk-O-Meter Rank (My term) - Score

1 - Riverside-San Bernardino-Ontario; CA - 95.5
2 - Fort Lauderdale-Pompano Beach-Deerfield Beach; FL - 92.2
3 - West Palm Beach-Boca Raton-Boynton Beach; FL - 91.9
4 - Orlando-Kissimmee; FL - 91.1
5 - Las Vegas-Paradise; NV - 88.1
6 - Tampa-St. Petersburg-Clearwater; FL - 86.6
7 - Santa Ana-Anaheim-Irvine; CA - 85.8
8 - Los Angeles-Long Beach-Glendale; CA - 85.7
9 - Miami-Miami Beach-Kendall; FL - 84.8
10- Sacramento-Arden-Arcade-Roseville; CA - 82.2
11- Portland-Vancouver-Beaverton; OR-WA - 79.7
12- Phoenix-Mesa-Scottsdale; AZ - 79.6
13- San Diego-Carlsbad-San Marcos; CA - 78.0
14- Jacksonville; FL - 73.2
15- Oakland-Fremont-Hayward; CA - 72.8
16- San Jose-Sunnyvale-Santa Clara; CA - 51.3
17- Providence-New Bedford-Fall River; RI-MA - 43.4
18- San Francisco-San Mateo-Redwood City; CA - 35.7
19- Washington-Arlington-Alexandria; DC-VA-MD-WV - 21.4
20- Nassau-Suffolk; NY - 21.2
21- Edison-New Brunswick; NJ - 16.2
22- Virginia Beach-Norfolk-Newport News; VA-NC - 13.8
23- Boston-Quincy; MA - 11.8
24- Detroit-Livonia-Dearborn; MI - 11.1
25- Minneapolis-St. Paul-Bloomington; MN-WI - 8.2

The PMI Economic and Real Estate Trends (ERET) containing the US Market Risk Index is published quarterly by PMI Mortgage Insurance Co., a subsidiary of The PMI Group, Inc. (NYSE: PMI). The Risk Index is a proprietary statistical model that measures geographic house price risk by predicting the probability that home prices in the nation's 381 largest metropolitan statistical areas (MSAs) and metropolitan statistical area divisions (MSADs) (as measured by the House Price Index from the Office of Federal Housing Enterprise Oversight (OFHEO)) will be lower in two years. The PMI U.S. Market Risk Index is based on data including the OFHEO House Price Index, labor market statistics from the Bureau of Labor Statistics, and the PMI Affordability Index, which uses local per capita household income, home price appreciation, and a blended mortgage rate to calculate the local share of mortgage payment to income relative to its baseline year of 1995. The PMI U.S. Market Risk Index scale ranges from one to 100 and translates to a percentage. For example, a score of 50 indicates a 50 percent chance that home prices will be lower in two years.

So, what does this all mean? Well for one, we are still in an area of declining values, with (in our case) an 11.1% probability of further declines in home values. While that’s not good, it’s better than living in Riverside/ San Bernardino/Ontario, CA; where the probability of further declines in value is 95+%. We certainly are not out of the woods at this point, but maybe we can avoid going too much further into the hole. I guess studies like this justify the continued use of the "declining market" designation and accompanying penalties by the banks.

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