Mortgage Insurer Ranks Risk in Top Markets

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A company that writes mortgage insurance and weighs how risky the loans are says that the odds are about one in three that the 50 largest metro areas will see home prices decline over the next two years.
“The risk nationally is still pretty high compared to the long-term,” says Mark Milner, senior vice president and chief risk officer for PMI Mortgage Insurance Company, based in Walnut Creek, Calif. “When prices go up

A company that writes mortgage insurance and weighs how risky the loans are says that the odds are about one in three that the 50 largest metro areas will see home prices decline over the next two years.

“The risk nationally is still pretty high compared to the long-term,” says Mark Milner, senior vice president and chief risk officer for PMI Mortgage Insurance Company, based in Walnut Creek, Calif. “When prices go up faster than incomes, affordability drops and that makes it more and more difficult for people to buy homes.”

The good news for homeowners is, prices have now dropped so much that the chances that they’ll fall any further is finally decreasing — a tiny bit. The risk of a price drop fell by 1.7 percent for the second quarter, a drop PMI finds insignificant.

PMI’s Market Risk Index(SM) produces a 0-100 score for each metro area rating the chances that an area home prices (as judged by the House Price Index from the Office of Federal Housing Enterprise Oversight) will be lower in two years. A score of zero would mean there was no way prices could go down; 1,000 would mean they definitely would. The average for the top 50 cities was 329, or 32.9%.

This index confirms the situation shown in other indicators. The First American CoreLogis Mortgage Risk index showed the risk of foreclosure rising 1.6 percent from the third quarter. The National Association of Realtors predicts overall prices on existing homes will fall 1.6% this year.

Since PMI insures mortgages when buyers put down a deposit of less than 20 percent, they need to know which types of loans are a good risk.

Homebuyers, however, need to remember that you’re not hoping that your house just stays flat in price. As an investment, you want it to at least keep up with inflation. And your interest on your mortgage costs you money, too.

The riskiest areas were places that zoomed up the most in the bubble: Florida, California, Nevada and Arizona. The index shows that they’re probably still too expensive for local resident s — and may be headed for a fall. The Riverside-San Bernardino area ranked the riskiest with a score of 608, or a 60 percent chance of further decline.

Watch out Los Angles, Las Vegas, Ft. Lauderdale and Phoenix, you’re going down. PMI gave you a better than 50% chance of your homes losing value. The New York metro area, where prices are still defying gravity, faces only a 28.7% chance of decline.

One of the safest cities for home prices is Pittsburgh, PA, which scored 85 or an 8.5 percent chance prices would drop over the next two years. Then again, how much worse could it get when the average home price in Pittsburgh is $123,000, less than half the average $298,000 for the Northeast.

Milner says homebuyers and homeowners should take a look at the index, but only as part of a bigger, longer financial strategy. The index only looks two years out, but a financial plan should look decades into the future. If you need a house and know you’re going to stay a long time, a drop over two years shouldn’t matter.

“It’s another piece of information for them to take into account,” Milner says. “We believe for home owner, buyers and sellers, the more information they have, the better decision they can make.”

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