PMI Risk Index: 19% Chance That Twin Cities Home Prices Will be Lower in Two Years

by Alex Stenback on January 15, 2008


The above mentioned graphic and stats come from the folks at PMI, who publish the US Market Risk index (link – PDF!), which purports to tell us which markets are at greatest risk for price declines.

How do they do this?  By comparing past historical data and trends in house price appreciation, affordability, housing supply, and foreclosure rates to our current situation, of course. 

Still lost?  Basically, it works like this.  Anywhere the aforementioned factors deviate from historic norms, a market is assigned a risk factor according to the severity of the deviation (the larger the deviaiton from past history, the more likely things will come back to earth, and the greater risk of decline.) Add ‘em all up, weight them for impact, wash, rinse, repeat, and you get the US Market Risk Index, which assigns each major statistical area a percentage between 0 and 100 that describes their risk of housing declines over the next two years.

Which brings us to the Twin Cities.  As suggested by the graphic above, and in the report (link- PDF!) – the Twin Cities have a 19% chance of seeing price declines over the next 2 years.  That also means there is an 81% chance that we won’t see price declines (glass half full! glass half full!)

With the exception of those sitting on the sidelines rooting for further price declines, I think most people would take those odds right now without missing a beat.  In fact, it’s almost tempting to call this data a sign of stability.

How-ev-er, since we have a degree in nothing whatsoever to do with economics or statistical analysis, it’s worth pointing out two factors that the risk index does not adjust for, that may add to the downside risks.

First, and most obvious, is the credit crunch.  The recent housing runup was based on the largest expansion of housing credit in the history of mankind.  The unwinding of the mortgage credit bubble will put pressure on demand for housing that this study does not seem to account for in any way.  We expect lending guidelines to tighten further throughout 2008, adding to these pressures. Sure, increases in affordability as prices fall may help, but we have a long way to go before simple price drops give back what what has already been taken away by tighter credit standards.  And did we mention things will get tighter?

The second factor is foreclosures, about which the study has this to say:

In today’s housing market changes in foreclosure rates are a leading indicator of changes in housing supply and provide additional insight into the direction ofhouse price movements. We would expect that house prices would be negatively affected by a rise in foreclosed properties in an area.

So what about our foreclosure rate?  A quick search of the Hennepin county website shows that in the first 15 days of this year, there have been 338 (!) sherriff’s sales, on pace for 7 HUNDRED (!!)foreclosures in Hennepin County.  In January.  In ALL of January last year there were 218.   

It seems that foreclosures in MN are nowhere near peaking, are excacerbated by price declines, and we are just now getting into the reset periods for many of the worst sub-prime ARM’s, with most of the ALT-A, Prime, and Option ARM resets forthcoming.

[Quick Aside: After all the wrangling about delinquent payments, potential short sales, etc. etc., the Sheriff sale is the first big step in a foreclosure, after which there is a redemption period of (usually) 6 months during which the owner can make good, after which the property can be re-sold by the "buyer" - usually the lender that held the mortgage.]

It will take at least 6 months before the properties being sold at foreclosure auction today are on the market, and at least another 3-6 months to actually sell and close.  This will put additional downward pressure on prices, especially in those areas hit hardest by foreclosure.

By not factoring in the credit crunch, and perhaps underestimating the impact of foreclosures on price pressure, we think this study underestimates the risk of further price declines in our market, though this is one case where we’d be very happy to be wrong. 
Winter 2008 Economic and Real Estate Trends Report [The PMI Group]

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