It's been a wild real estate ride for many areas in
the country, some areas seeing unusually high
appreciation. But that may be about to change.
"Home price appreciation has just been very, very
strong in the last five years, prices have gone up 83
percent in five years in the Pacific region, they've
gone up 70.3 percent in New England," says Beth
Haiken, Assistant VP of Public Relations for PMI
Group, the second largest mortgage insurance company
in the US.
But the Economic and Real Estate Trends report
recently released by PMI Group, identifies six housing
markets as having a more than 50 percent chance of a
housing price decline in the next two years.
Just one quarter ago, there were only two regional
markets in this position. Nationwide the report
predicts a 21.3 percent chance of a housing price
decline. That's slightly up from last quarter's report
which predicted a 20 percent chance.
The top 10 states at risk of a housing price decline
in the next two years according to the PMI Group
report are: California, Minnesota, Michigan, New York,
New Jersey, New Hampshire, Massachusetts, Rhode
Island, Connecticut, and Maryland.
"What we saw is that risk continues to be concentrated
in the coastal areas, which has been true for a while
and that in those costal areas there were some pretty
big moves," says Haiken.
Especially on the west coast where six of the top 10
riskiest areas for a housing price decline are in
California, they are grouped as follows: San
Diego/Carlsbad/San Marcos ranked third, San
Jose/Sunnyvale/Santa Clara, Santa Ana/Anaheim/Irvine,
Oakland/Fremont/Hayward, San Francisco/San
Mateo/Redwood City, and Riverside/San
The report takes housing price information from the
Office of Federal Housing Enterprise Oversight,
employment data from the Bureau of Labor Statistics
and the Affordability Index measures constructed by
"We look at home price data -- where [prices] have
been, how much have they appreciated and how quickly.
We look at labor market data, including employment
growth and the unemployment rate, and then we look at
affordability -- how much does it cost to pay for the
median priced home and what percentage of a typical
income [is needed to buy] in that area. If those three
things are in balance, which they need to be in order
to form that equilateral triangle, then risk in an
area tends to be fairly low," explains Haiken.
She adds that when one or more of the legs of the
equilateral triangle gets out of balance, risk goes
Increasing the risk in many of these areas is the fact
that many homeowners stretched their budgets by using
interest-only loans and piggyback mortgages in order
to qualify and get into their houses.
"The thing that those products have in common, whether
it is an interest-only loan or a piggyback mortgage
with a home equity line of credit second, is that they
transfer risk to the consumer, particularly interest
rate risk," says Haiken.
She says that homebuyers are wise to always consider
long-term effects of a loan.
"These are all good products ... . But we encourage
people to think about what is the right product for
them over time and how much risk is appropriate for
them to take on. People should think long-term rather
than short-term because real estate is a significant
investment. For most Americans it's still the biggest
investment they'll make and for a lot of people it's
the biggest nest egg that they have going into
retirement," says Haiken.
However, as with any statistics, what you glean from
them depends on how you view them.
Haiken uses this example, "In Boston, which tops our
list, there is a roughly 55 percent chance of a price
decline. The flip side of that is that there is a 45
percent chance that prices won't decline in the next
She also points out that the index does not attempt to
predict the length of a decline or the severity of the
decline in housing prices.
Making the list for the top 10 least risky states for
a predicted housing price decline are: Washington,
Idaho, Wyoming, Utah, New Mexico, North Dakota,
Oklahoma, Arkansas, Mississippi and Alabama.