Housing Bubble
'No Nationwide Housing Price Bubble' says PMI Group
February 28, 2003
(BUSINESS WIRE)--Amid pervasive economic uncertainty due to the increasingly volatile world political and military situation, the likelihood of significant home price declines over the next two years has remained stable, rising just one percentage point as of November 2002 compared to November 2001, according to the PMI Risk Index released by PMI Mortgage Insurance Co., a subsidiary of The PMI Group, Inc. The PMI Risk Index actually declined from the previous quarter's level of 126 to the 110 level in the most recent report.
In November 2002, the average PMI National Risk Index was 110, a one point increase from November 2001 when the Risk Index was 109. This implies that the average probability of home price declines greater than 10 percent for the 274 metropolitan statistical areas (MSAs) tracked by PMI is about 5.94 percent within the next two years. PMI uses the PMI Risk Index in part to assess and manage risk levels in its own mortgage insurance portfolio.
PMI analysts report that they do not see evidence of a nationwide price bubble in single-family housing markets. Price bubbles arise if speculative investment motives lead to an initial period of explosive growth in an asset's price. PMI analysts believe that differential rates of productivity growth between the general economy and the housing sector, not bubbles, explain the divergence between general inflation rates and housing price growth rates.
Despite the sluggish economy and growing political risks, PMI analysts believe that a variety of measures indicate that the housing sector around the country remains strong. Home prices continue to increase as a result of strengthening fundamental determinants of housing values, including a growing population, rising incomes, and declining mortgage interest rate costs of financing home purchases. Given the enduring weakening of the stock market, housing has reemerged as the favored asset class in household portfolios.
Although the possibility of a double-dip recession lingers, according to PMI analysts, there are signs that once the wet blanket (Iraq) smothering our economy is removed, the economy may recover despite lingering uncertainty. PMI analysts believe that the future of the economy depends largely on the resumption of private investment spending, employment growth, and consumer spending. But as uncertainty persists, low interest rates and increased government spending on security and defense should help the economy grow at least modestly as it struggles to avoid recession.
The OFHEO home price index for Third Quarter 2002 illustrates that home price appreciation trends for average U.S. home prices increased 6.16 percent from third quarter 2001 over third quarter 2002. However, the annualized appreciation slowed to 3.4 percent compared to 9.9 percent last quarter. Some areas in particular are slowing according to the third quarter appreciation rates, notably the Midwest region, which has been impacted by flattening productivity in the manufacturing sectors since 2001.
The National Association of Realtor's latest report on total existing-home sales showed that nationwide, the seasonally adjusted annual rate was 6.55 million units in the fourth quarter, up 8.6 percent from the 6.03 million-unit level in the fourth quarter of 2001. In addition, fourth-quarter sales were up 5.8 percent from a pace of 6.19 million units recorded in the third quarter of 2002 and were the second-highest level on record.
Regionally, the average PMI Risk Index increased year-over-year for four of the nine geographic regions tracked by PMI. Three of the nine geographic regions maintained the same Risk Index year-over-year, and two of the nine geographic regions showed less risk than the previous year.
The largest regional Risk Index year-over-year increase came from geographical areas west of the Mississippi, where the West South Central region's Risk Index increased to 159 from 149, and the West North Central region's Risk Index increased to 104 from 97.
The Mid Atlantic region had the lowest PMI Risk Index and appears least likely to experience a significant price decline within the next two years.
PMI Risk Index by Region
(Population weighted)
# Nov 2002 Nov 2001 % of
Region MSA Risk Index Risk Index change population
------ --- ---------- ---------- ------ ----------
East North Central 51 102 98 +4 16%
East South Central 14 101 98 +3 4%
Mid Atlantic 34 95 95 17%
Mountain 16 134 137 -3 6%
New England 24 102 102 5%
Pacific 26 105 115 -10 18%
South Atlantic 42 102 102 18%
West North Central 24 104 97 +7 6%
West South Central 43 159 149 +10 11%
National average 274 110 109 +1 100%
PMI has maintained a grade of 'high risk' for ten MSAs due to their high risk index score and their economic dependency on the information technology industry, which has suffered from cutbacks in private investment and job losses. These cities are: Austin-San Marcos, TX (241), Dallas, TX (207), San Jose, CA (199), Portland-Vancouver, OR-WA (178), Denver, CO (160), Salt Lake City-Ogden, UT (153), Phoenix, AZ (148), Seattle-Bellevue-Everett, WA (139), Oakland, CA (128), and San Francisco, CA (105). All ten MSAs received a grade of 'high risk' for the third consecutive quarter, except for Dallas, which had a grade of 'medium risk' last quarter.
PMI Risk Index by MSA
Risk Risk
MSA Index Grade
--- ----- -----
Austin-San Marcos, TX 241 High
Dallas, TX 207 High
San Jose, CA 199 High
Portland-Vancouver, OR-WA 178 High
Denver, CO 160 High
Salt Lake City-Ogden, UT 153 High
Phoenix-Mesa, AZ 148 High
Seattle-Bellevue-Everett, WA 139 High
Oakland, CA 128 High
San Francisco, CA 105 High
Fort Worth-Arlington, TX 182 Medium
Houston, TX 178 Medium
Raleigh-Durham-Chapel Hill, NC 168 Medium
San Antonio, TX 166 Medium
Miami, FL 145 Medium
Greensboro-Winston-Salem-High Pt, NC 143 Medium
New Orleans, LA 141 Medium
Fort Lauderdale, FL 137 Medium
Charlotte-Gastonia-Rock Hill, NC-SC 131 Medium
Milwaukee-Waukesha, WI 124 Medium
Indianapolis, IN 124 Medium
Kansas City, MO-KS 121 Medium
Cleveland-Lorain-Elyria, OH 118 Medium
Pittsburgh, PA 112 Medium
National Average 110 --
Tampa-St. Petersburg-Clearwater, FL 108 Medium
Sacramento, CA 107 Medium
Orlando, FL 104 Medium
Las Vegas, NV-AZ 100 Medium
Minneapolis-St. Paul, MN-WI 99 Medium
Atlanta, GA 97 Medium
Columbus, OH 95 Medium
St. Louis, MO-IL 94 Medium
Chicago, IL 93 Medium
New York, NY 93 Medium
Detroit, MI 92 Medium
Riverside-San Bernardino, CA 91 Medium
Nassau-Suffolk, NY 91 Medium
Nashville, TN 90 Medium
Orange County, CA 88 Medium
Cincinnati, OH-KY-IN 87 Medium
Newark, NJ 84 Medium
Boston, MA-NH 81 Medium
Los Angeles-Long Beach, CA 78 Medium
Bergen-Passaic, NJ 76 Medium
Providence-Fall River-Warwick, RI-MA 76 Low
Philadelphia, PA-NJ 71 Low
San Diego, CA 70 Low
Washington, DC-MD-VA-WV 69 Low
Baltimore, MD 66 Low
Norfolk-Virginia Bch-Newport News,
VA-NC 57 Low
The PMI Risk Index is a statistical model based on certain measures of economic activity and conditions that PMI believes is predictive of the likelihood of home price declines exceeding 10% over the next two years. Factors used to derive the PMI Risk Index include, but are not limited to, the House Price Index from the Office of Federal Housing Enterprise Oversight and labor market statistics from the Bureau of Labor Statistics.
The PMI Risk Index scale ranges from one to 1,000, where a higher score indicates a higher likelihood of future home price declines. For example, a PMI Risk Index of 100 indicates a 5.4% chance of a decline in home prices exceeding 10% within the next two years.
Because the PMI Risk Index scale is linear, if the PMI Risk Index for an MSA were to increase by 100%, say to 200 from 100, then, according to the PMI Risk Index model, the risk of home price decline has also doubled. Alternatively, if the score were to decline by 50%, for example to 50 from 100, the risk of home price decline has also declined by 50%.
A complete copy of the latest PMI Economic and Real Estate Trends report containing the latest PMI Risk Index scores and analysis can be found at www.pmigroup.com
Source: PMI Group
