There's nearly a 35 percent chance home prices in major metros will be lower in two years than they are now. Some areas, however, especially those in the West, Southwest and South face a far greater risk for tumbling home prices.

When the PMI Group, Inc. subsidiary, PMI Mortgage Insurance Co., this week released its "Summer 2007 U.S. Market Risk Index", it found a 34.6 percent chance that prices will be lower in two years for the MSAs as a group.

However, that chance zoomed to 60 percent or greater in Riverside, CA; Phoenix, AZ; Las Vegas, NV; and West Palm Beach, FL, cities where the potential for home price decline is greatest, PMI reported.

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.

The risk index is based on data from the Office of Federal Housing Enterprise Oversight (OFHEO) and the Bureau of Labor Statistics as well as PMI's Affordability Index (household income, home price appreciation, mortgage rates). It ranks the nation's 50 largest metropolitan statistical areas (MSAs) according to home price volatility.

The index ranges from one to 1,000 and translates to a percentage. For example, a score of 100 indicates a 10 percent chance that home prices will be lower in two years.

"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," explained Mark F. Milner, chief risk officer at PMI.

California has seen high price volatility for several quarters and, most recently, significantly slowing rates of appreciation. Oakland, Sacramento, and San Diego all registered home price declines in the latest period. That's partially because the boom left the market with high home prices buyers can't afford or can't find the financing to give them the leverage they need.

Likewise, Florida MSAs have seen appreciation rates slow from recent highs. The trend indicates volatility. Current appreciation rates are, however, mixed, coming in as low as a 2.16 percent decline in West Palm Beach, but as high as 11.44 percent in Miami.

Of all the 50 MSAs, Phoenix suffered the largest drop in the rate of appreciation from 37.33 percent in the first quarter 2006 to only 4.52 percent a year later.

The least risk of home price declines was found in Midwestern MSAs Cincinnati-Middletown, OH-KY-IN; Columbus, OH; and Indianapolis-Carmel, IN; in Texas, Houston-Sugar Land-Baytown; Dallas-Plano-Irving; and Fort Worth-Arlington, TX and in Pittsburgh, PA. As a group, the risk of home price decline in the next two years for those MSAs was only 7.9 percent.

The OFHEO reported 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 Warren, MI; and Cleveland, OH-saw slight year-over-year price declines.

Even in some hard hit areas, however, the risk of price declines is tempered by strong economic fundamentals, including low unemployment.

"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 Milner.

Published: June 21, 2007

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.