The Riskiest Housing Markets: A Drop in Home Prices Forecast

Boston and San Diego are among the areas poised for declines in home values, a study says. They have a more than 50% chance of a fall in prices during the next two years.
By: Janet Morrissey: The Wall Street Journal
Home prices in some of the nation's largest markets are poised for a fall, according to a study that says homes are overvalued in many cities.

The PMI U.S. Market Risk Index report, released yesterday, named Boston, San Diego, Long Island, N.Y., Santa Ana, Calif., and Oakland, Calif., as the markets facing the biggest risk of a price correction. The index showed these markets have a more than 50% chance of experiencing price declines during the next two years. New York City ranked 14th, with a 33% chance.

Nationwide, there is a 21.8% chance that overall house prices across the 50 largest housing markets will see prices fall, up from 21.3% in the previous quarter. The markets with the lowest risk of a correction are Cincinnati, Memphis, Tenn., Indianapolis and Pittsburgh, where the risk is less than 6%.

"We believe that over the medium to long term, prices will move into better alignment with local economic factors, in particular income," Mark Milner, chief risk officer with PMI Mortgage Insurance Co., a unit of PMI Group Inc., said in the report.

PMI calculated its Risk Index by tracking and comparing home-price appreciation, labor markets, employment levels, affordability and the percentage of monthly income that a mortgage takes up in each market. The Risk Index estimates the chances of a price correction of any size in the next two years.

The Valuation Index, which the firm just introduced, is based on home-price appreciation, the cost of a 30-year fixed-rate mortgage and the public demand for housing in each market. This index offers a snapshot of how much a home is overpriced or undervalued in each market at this moment.

The markets facing the biggest potential correction are Los Angeles, Sacramento and Riverside, Calif., where prices are estimated to be overvalued by 33.7%, 31.3% and 30.7% respectively, the report said. New York City's prices are 16.3% overvalued, according to PMI.

About half of the 50 markets are overvalued by 10% or more, the report said. Only 11 markets are undervalued.

Marco van Akkeren, an economist with PMI Mortgage Insurance, said affordability has weakened during the past several quarters as home-price increases didn't reflect market fundamentals. The firm releases its Market Risk report quarterly.

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