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PMI’s Index Shows Decline in Risk of Home Prices Heading Lower

Walnut Creek, California-based ""PMI Mortgage Insurance Co."":http://www.pmi-us.com/, the principal operating subsidiary of the PMI Group, Inc., released its second quarter 2010 ""U.S. Market Risk Index"":http://www.pmi-us.com/PDF/q2_10_pmi_eret.html Monday, which showed a considerable reduction in risk of lower future house prices.

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The index, which measures the probability that house prices in a specific geographic area will be lower in two years, was determined through a logistic regression analysis using fourth quarter 2009 data.

According to the index, 356 of the nation's 384 metropolitan statistical areas (MSAs) had a declining risk score, with only one showing a slight increase and the remainder unchanged. The number of MSAs in the ""riskiest"" category (90 â€" 100) fell by 26.4 percent during the fourth quarter, while those in the ""least risky"" category (zero â€" 10) increased by 79 percent.

In addition, the number of MSAs with a risk score of less than 50, suggesting better than even odds of higher housing prices in two years, increased 26.5 percent to 186 from 147 the prior quarter. And the number having a score over 50, indicating better odds of lower prices in the next two years, fell by 16.5 percent to 198 from 237.

A significant number of the top 50 MSAs remained in the riskier categories, with 64 percent still having a great than 50 percent chance of lower prices by the end of 2011. However, that figure was down from 82 percent in the previous quarter.

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PMI said it is important to note that the Risk Index does not measure magnitudes, so the potential declines might not be substanial. Moreover, the index does not project the pattern of potential house price declines, so drops in 2010 could be followed by smaller increases in 2011.

On a positive note, 40 percent of the top 50 MSAs showed a score improvement of 20 percent or more. Additionally, 36 percent had risk scores less than 50, up from 20 percent in the prior quarter, indicating a probability of higher prices in two years.

According to PMI, a combination of factors led to decreases in the risk of lower housing prices in many MSAs, including affordability, generally improving mortgage credit quality, decreasing foreclosure rates, and a drop in excess housing supply.

Affordability was a driving factor behind the decreased Risk Index. For all 384 MSAs, the average Affordability Index reading was 140.8 in the fourth quarter of 2009, compared with a reading of 133.9 for the third quarter. An Affordability Index score exceeding 100 indicates that homes have become more affordable; a score below 100 means they are relatively less affordable. Across the nation, approximately 98 percent of the 384 MSAs showed higher affordability.

""Housing affordability continued to climb, and in some MSAs is at or near record levels,"" said David Berson, PMI chief economist and strategist. ""House prices have dropped sharply relative to incomes in most areas suggesting that prices have fully, or more than fully, adjusted for their unsustainable increases during the housing boom.""

Looking forward, PMI expects risk scores to continue falling but said many MSAs â€" especially in the sand states â€" are likely to have high levels of risk for a while. Declining unemployment rates and the decrease in risky lending will be important forces in reducing the risk of lower prices, and while the magnitude of future improvement in the Risk Index is difficult to gauge, the direction seems clear, the company said.

About Author: Brittany Dunn

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