PMI Group, Inc. (NYSE) 45.68 -0.13 ( -0.28%)
Strong Economies Balance Increasing Risk of Home Price Declines, According to PMI Mortgage Insurance Co.'s Spring U.S. Market Risk Index;
New PMI Research Demonstrates the Historical Value of Homeownership
- BusinessWire
WALNUT CREEK, Calif., Apr 04, 2006 (BUSINESS WIRE) -- Forty-eight of the nation's 50 largest metropolitan statistical areas (MSAs) face a greater risk of declining home prices this quarter, PMI Mortgage Insurance Co. announced today, but the continued strength of the national and local economies suggests that in the absence of an economic shock, the once red-hot housing market will cool gradually. Appreciation has slowed in nearly half of the MSAs as compared to last quarter. Affordability remains a problem with eight MSAs registering affordability levels considered low by historical standards, due to appreciation and higher interest rates.
In addition to the PMI U.S. Market Risk Index showing the risk of price declines, PMI's Spring Economic and Real Estate Trends (ERET) includes a study of the past value of homeownership. The study shows that between 1986 and 2005, based on the home price index provided by the Office of Federal Housing Enterprise Oversight (OFHEO), owning a home in one of the 50 largest MSAs generally resulted in a positive return on investment, with the chance of a positive return increasing the longer the home was owned. "What we found was that across the nation's 50 largest MSAs, owning a home for 10 years or more resulted in a positive return in 100 percent of the cases," explained Mark Milner, Chief Risk Officer of PMI Mortgage Insurance Co. "This dropped to 95 percent with a seven-year ownership term and to 92 percent with a five-year ownership term--still a pretty impressive rate. Homeownership clearly can be an important strategy for building wealth over the long term."
U.S. Market Risk Index scores increased for all of the top 50 MSAs except Chicago, IL, whose score decreased one point (New Orleans was not scored this quarter due to the catastrophic impact of Hurricane Katrina). Fourteen of the top 50 MSAs now have risk scores above 500, meaning they face a 50 percent or greater risk of home price declines in the next two years, up from 11 MSAs last quarter. The average score has increased from 261 last quarter to 287. The biggest change was in Minneapolis, MN, which gained 90 points, taking it to a score of 350 and up two spots in the ranking to No. 19.
"The risk of price declines has increased somewhat, but the national and local economies remain strong, which should support a gradual return to an economic climate characterized by slow, steady appreciation," Milner said. Of the top 50 MSAs all but five--Newark, NJ, Detroit, MI, Warren, MI, Cleveland, OH, and Indianapolis, IN--saw employment growth. Unemployment remains below 5 percent in all but 14 of the top 50 MSAs.
"The most significant change we saw this quarter was in affordability," Milner said. "With continued double-digit appreciation in many areas coinciding with higher interest rates, affordability is becoming more of a challenge for American homebuyers." According to PMI's Affordability Index, a proprietary index that is one component of the U.S. Market Risk Index, affordability decreased in all 50 of the nation's largest MSAs in the fourth quarter of 2005. There are now eight MSAs with Affordability Index scores below 70, which PMI considers a threshold for vulnerability to an economic shock, compared to just two MSAs last quarter. Three more MSAs have Affordability Index scores between 70 and 75. The lower Affordability Index numbers reflect the increase in interest rates in the fourth quarter of 2005, along with the fact that in many areas home price increases continue to outstrip incomes.
Continuing a trend that began last quarter, the Risk Index also registered deceleration in the pace of home price appreciation. Appreciation slowed in 21 of the 50 largest MSAs. The biggest changes were in Las Vegas, NV, where appreciation slowed by 18 percentage points, and San Diego, CA, where it slowed by 13 percentage points. With year over year rates of 14.4 percent and 10.5 percent respectively, however, appreciation remained higher than historical averages in both areas. Twenty-six of the of the 50 largest MSAs saw double-digit appreciation, led by Phoenix, AZ at 33.4 percent.
Other U.S. Market Risk Index trends include:
-- In addition to Minneapolis, MN, MSAs that saw significant increases in risk were Virginia Beach, VA (+65 points to 274), Baltimore, MD (+62 to 279), Newark, NJ, (+61 to 427), New York, NY (+58 to 506), and Washington, D.C., (+56 to 401).
-- Riverside and Oakland, CA traded places, making Riverside No. 5 and Oakland No. 7. San Francisco and San Jose, CA also traded places, making San Francisco No. 10 and San Jose No. 11. Other than that, the top 15 are the same as last quarter with risk still clearly focused on the coasts.
-- There are now eight areas with Affordability Index scores below the vulnerability threshold of 70: San Diego, Santa Ana, Riverside, Sacramento, Oakland, and Los Angeles, CA, and Fort Lauderdale and Miami, FL. Long Island (Nassau-Suffolk), NY, San Jose, CA, and Tampa, FL are also considered potentially vulnerable with scores between 70 and 75.
-- While slowing, appreciation remains high by historical standards. Phoenix, AZ, Orlando, Fort Lauderdale, Miami, and Tampa, FL, Washington, D.C., Virginia Beach, VA, and Los Angeles, CA saw year-over-year appreciation of more than 20 percent.
-- The five least risky areas among the top 50 MSAs are San Antonio, TX, Cincinnati, OH, Indianapolis, IN, Memphis, TN, and Pittsburgh, PA.
A complete copy of the latest PMI Economic and Real Estate Trends report is available at pmigroup.com. An appendix that provides Market Risk Index data for all US MSAs is also available. A podcast of Spring ERET results is available at www.pmigroup.com/newsroom.
PMI US Market Risk Index, by MSA
San Diego-Carlsbad-San Marcos,CA 598 Warren-Farmington Hills-Troy, MI 212
Santa Ana-Anaheim-Irvine, CA 589 Denver-Aurora, CO 168
Boston-Quincy, MA 588 Orlando, FL 160
Nassau-Suffolk, NY 586 Chicago-Naperville- Joliet,IL 147
Riverside-San Bernardino, CA 579 Atlanta--Marietta, GA 147
Sacramento-Roseville, CA 577 Phoenix-Scottsdale,AZ 146
Oakland-Fremont-Hayward, CA 576 Philadelphia, PA 123
Providence-New Bedford-RI-MA 566 Seattle-Bellevue,WA 121
Los Angeles-Long Beach, CA 563 Kansas City, MO-KS 111
San Francisco-San Mateo,CA 550 St Louis, MO-IL 111
San Jose-Santa Clara,CA 548 Portland-Vancouver,OR-WA 109
Cambridge-Newton-Framingham, MA 534 Austin-Round Rock, TX 99
Milwaukee-Waukesha-West
Edison, NJ 516 Allis, WI 99
New York-Wayne-White Plains, NY- Houston-Baytown-
NJ 506 Sugarland, TX 97
Charlotte-Gastonia-
Las Vegas-Paradise, NV 457 Concord, NC-SC 93
Newark-Union, NJ-PA 427 Dallas-Plano-Irving, TX 88
Fort Lauderdale-Pompano Beach-
Deerfield Beach, FL 423 Fort Worth-Arlington, TX 77
Washington-Arlington-Alexandria, Cleveland-Elyria-Mentor,
DC-MD-VA-WV 401 OH 74
Minneapolis-St Paul-Bloomington, Nashville-Davidson-
MN-WI 350 Murfreesboro, TN 72
Detroit-Livonia-Dearborn MI 336 Columbus, OH 69
Miami-Miami Beach-Kendall, FL 327 San Antonio, TX 69
Tampa-St Petersburg-Clearwater, Cincinnati-Middletown,
FL 294 OH-KY-IN 67
Average 287 Indianapolis, IN 61
Baltimore-Towson, MD 279 Memphis, TN-MS-AR 60
Virginia Beach-Norfolk-Newport
News, VA-NC 274 Pittsburgh, PA 59
The PMI Market Risk Index is not tuned to evaluate the effect of catastrophic events such as Hurricane Katrina. As a result there is no score for the New Orleans-Metairie-Kenner MSA this quarter.
About PMI's Economic & Real Estate Trends (ERET) and US Market Risk Index
The PMI Economic and Real Estate Trends (ERET) containing the US Market Risk Index is published quarterly by PMI Mortgage Insurance Co., a subsidiary of The PMI Group, Inc. . The Risk Index is a proprietary statistical model that measures geographic house-price risk by predicting the probability of a regional decline in home prices in the nation's 50 largest metropolitan statistical areas (MSAs) and metropolitan statistical area divisions (MSADs) over the next two years. The PMI US Market Risk Index is based on the House Price Index from the Office of Federal Housing Enterprise Oversight (OFHEO), labor market statistics from the Bureau of Labor Statistics, and the PMI affordability index, which uses local median household income, home price appreciation, and the price of a conventional mortgage to calculate the local share of mortgage payment to income relative to its baseline year of 1995.
The PMI US Market Risk Index scale ranges from one to 1,000 and translates to a percentage. For example, a score of 100 indicates a 10% chance of a decline in home prices over the next two years. A higher score indicates a higher likelihood of future home price declines. The PMI Risk Index scale is linear. In other words, an increase in risk index score of 100% (for example, from 100 to 200) indicates that the risk of home price decline has doubled. Conversely, a decline in risk index score by 50% (from 100 to 50) indicates that the risk of home price decline has declined by 50%. The Affordability Index score is linear against a baseline of 100 in 1995. For example, an AI score of 85 means that the median home in that area is 15 percent less affordable than it was in 1995.
About PMI Mortgage Insurance Co.
PMI Mortgage Insurance Co., a subsidiary of The PMI Group, Inc. , is a leading U.S. residential mortgage insurer, licensed in all 50 states, the District of Columbia, and Puerto Rico. Private mortgage insurance expands home ownership opportunities by enabling borrowers to buy homes with down payments of less than 20% and facilitates the sale of low down payment mortgages in the mortgage capital markets. PMI is incorporated in Arizona and headquartered in Walnut Creek, CA. For more information: www.pmigroup.com.
Cautionary Statement: Statements in this press release that are not historical facts or that relate to future plans, events or performance are 'forward-looking' statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, PMI's U.S. Market Risk Index and any related discussion, and statements relating to the possible gradual cooling of the U.S. housing market as well as future economic and housing market conditions. Forward-looking statements are subject to a number of risks and uncertainties including but not limited to, the following factors: changes in economic conditions, economic recession or slowdowns, adverse changes in consumer confidence, declining housing values, higher unemployment, deteriorating borrower credit, changes in interest rates, the effects of Hurricanes Katrina and Rita or other natural disasters, or a combination of these factors. Readers are cautioned that any statements with respect to future economic and housing market conditions are based upon current economic conditions and, therefore, are inherently uncertain and highly subject to the changes in the factors enumerated above. Other risk and uncertainties are discussed in the Company's filings with the Securities and Exchange Commission, including our report on Form 10-K for the year ended December 31, 2005.
SOURCE: The PMI Group, Inc.
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