The PMI Mortgage Insurance Company, the U.S. subsidiary of The PMI Group, Inc., has updated its 2007 U.S. Market Risk Index. By ranking the 50 largest metropolitan statistical areas (MSAs) by the likelihood that home prices will be lower in two years, the average score, weighted by population, was 346 -- which means there's a 34.6 percent chance that home prices will be lower in two years than they are now.

"The market's changing tide doesn't mean it is a bad time to buy or own a house, but it is a reminder that homeownership is a long-term investment," said Mark F. Milner, chief risk officer of PMI Mortgage Insurance Co. "For buyers, in many areas it's a much friendlier market than it was even a year ago, but you need to choose your mortgage product carefully. If you already own, you need to take the long view and have realistic expectations about how much your property may appreciate. Building equity in a home is still a great way to build wealth over the long term."

The new risk model "gives more weight to the recent volatility of an area's price movements and is better suited for the vastly different market we are in today," says Milner. "Our prior model, in contrast, was tuned to the rapidly appreciating market we were in from 2002 to 2006."

An additional feature of the enhanced index is the introduction of risk ranks, which group areas with consistent characteristics together. Riverside, CA, Phoenix, AZ, Las Vegas, NV, and West Palm Beach, FL, rank highest on the index, with a 60 percent or greater chance that home prices will be lower in two years. Five of the 11 MSAs facing a greater than 50 percent chance of a price decline are in California (Los Angeles, Santa Ana, Oakland, Sacramento, and San Diego) and four are in Florida (Orlando, Fort Lauderdale, Miami, and Tampa); the other two are Boston, MA, and Washington, D.C.

Texas, Ohio, Indiana, and Pennsylvania MSAs constitute the lowest ranked group -- those facing a less than 10 percent chance of lower prices.

"What the markets with the greatest risk of decline have in common is a history of price volatility: rapidly rising rates of price appreciation above the long-term average followed by a recent sharp slowdown in the rate of appreciation," Milner explains. "Markets with a history of volatility are more likely to see price declines in the future. MSAs with a history of low to moderate rates of volatility in house price appreciation have a lower risk of price declines."

According to the Office of Federal Housing Enterprise Oversight, the rate of price appreciation slowed in all but five of the 50 largest MSAs, and only five saw appreciation in the double digits in the first quarter of 2007, down from 26 in the first quarter of 2006. Nine MSAs -- West Palm Beach, FL, Oakland, Sacramento, and San Diego, CA, Boston and Cambridge, MA, Detroit and neighboring Warren, MI, and Cleveland, OH, saw slight year-over-year price declines. In most areas, the risk of price declines continues to be balanced by strong economic fundamentals, including low unemployment.

In related news, builders have lost some confidence in the recovery of the housing market. New home construction fell 2.1 percent in May, and although there was a slight increase in permits, the National Association of Home Builders chief economist David Seiders says that the subprime meltdown is affecting buyers' ability to qualify for loans in a stricter lending environment. Inventories of homes are still swollen in both new and existing homes. And the recent rise of mortgage interest rates by over half a point in a month has thrown more cold water on the market.

Housing won't turn around until next year, says Seiders, and will drag on the nation's economy throughout 2007.

That said, others are calling for a bottom, which should cheer homebuyers and sellers alike. Buyers who can jump in at the bottom will be that much further ahead of the turnaround, and sellers know that market conditions have to improve from here.

One positive note is that new home building has slowed, removing some of the glut of homes from the market. "Sustainable building" is about 1.85 million new homes a year, says the NAHB. That number was well over 2.03 million in May 2006 and has been trimmed back to 1.47 million on a seasonally adjusted rate in 2007.