Riskiest Housing Markets? (PMI Market Risk Index)

Thursday, October 20, 2005 | 06:50 AM

Interesting (if understated) article in WSJ yesterday about the PMI U.S. Market Risk Index report; The PMI Index suggested that about "half of the 50 markets are overvalued by 10% or more, the report said. Only 11 markets are undervalued."

Recall that I have been saying that Housing is an extended asset class, and not a bubble. That makes overvalued regions vulnerable to a pullback, as opposed to a full blown crash.

Here's the Ubiq-cerpt:™

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 . . .

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.

Here's the methodology behind their calculations:

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.

click for larger table


Home Prices Might Fall Soon
October 19, 2005; Page D3

Thursday, October 20, 2005 | 06:50 AM | Permalink | Comments (6) | TrackBack (0)
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The weakness of this approach is they don't consider the amount of construction, level of speculative loans, and number of speculators in the market. Without these it tends to be the higher the price, the more risk, hardly enlightening. As most of these are high growth areas, they will also be among the first to recover from a downturn, while a place like Ohio may never.

Posted by: Lord | Oct 21, 2005 2:38:44 PM

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