Two Americas: California outlook weakens while most markets improve

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Mortgage insurer PMI Group’s latest report on the risk of falling home prices concludes there are ‘two distinctly different paths’ for housing in America right now: most of the nation’s housing markets are showing signs of improvement, but bubble-inflated markets in California and Florida are showing signs of further deterioration amid rising foreclosures.

Addressing the risk of falling prices over the next two years, PMI reports, ‘risk continued to intensify in many of the (metropolitan areas) where home price growth had significantly exceeded historical norms, but continued to decline in many other areas across the country.’

The above map shows the ‘two Americas’ in housing risk in the first quarter of 2008 -- the red areas are cities where PMI is most certain that housing prices will decline over the next two years.

In 35 of the 50 largest metropolitan areas in America, PMI reports, the risk of future price declines decreased in the first quarter; however, in California, the risk of price declines increased in 25 of the state’s 28 metropolitan areas.

The main shadow over the state’s real estate markets, according to PMI: foreclosures, which tend to drive down prices. PMI did find one sign indicating that California’s market may be normalizing: excess housing supply is declining in many markets -- the supply of unsold inventory in Orange County, for example, dropped from 29.0 months’ worth in late 2007 to 20.3 months in early 2008. In Los Angeles, inventory declined from 18.7 months to 17.9 months, PMI reports.

To calculate ‘risk index,’ PMI uses economic, housing and mortgage market factors, including home price appreciation, employment affordability, excess housing supply, interest rates and foreclosure activity.

Here’s PMI Group’s list of the cities with the highest ‘risk factors’ in the first quarter of 2008 (A ‘risk factor’ of 85% means PMI believes there is an 85% chance of declining property values in the next two years):

National Rank City Risk index
1) Riverside-San Bernardino-Ontario 95.5%
2) Fort Lauderdale-Pompano Beach 92.2%
3) W. Palm Beach-Boca Raton 91.9%
4) Orlando-Kissimmee 91.1%
5) Las Vegas 88.1%
6) Tampa-St. Petersburg 86.6%
7) Santa Ana-Anaheim-Irvine 85.8%
8) Los Angeles-Long Beach-Glendale 85.7%
9) Miami-Miami Beach 84.8%
10) Sacramento 82.2%

--Peter Viles
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Graphic credit: PMI Group