I look forward to the PMI real estate price appreciation reports. PMI sells private mortgage insurance so their estimates are more reality-based, in my opinion, than the government or academic studies.

When PMI makes a miscalculation about the odds of real estate prices declining, the company can lose money. When a government agency or university makes a miscalculation, there are few if any consequences. So I take PMI very seriously. See here and here.

In this lastest issue of their quarterly report, Economic and Real Estate Trends, PMI unveiled a new model to assess the likelihood that home prices in a given metropolitan statistical area will be lower in two years.

Phoenix came out in this new model as the second most risky market in the United States with an estimated 65% chance that home prices will be lower in two years.

Compared to the previous version of the model, Phoenix moved from being the 23rd riskiest market to the 2nd. PMI’s estimated risk of home prices in Phoenix being lower in 2 years went from 45% to 65%.

The reason for the big change in Phoenix was because, “Our new model gives more weight to the recent volatility of an area’s price movements.” Phoenix led all cities in this measure.

Phoenix appreciation between the first quarter 2005 and the first quarter 2006 was 37.33%, the highest in the country over that period. The next year, however, Phoenix appreciation was only 4.52% (between the first quarter of 2006 and the first quarter of 2007).

So, PMI calculated the change in appreciation rate in Phoenix to be -32.81%, the largest deceleration in the country, and probably the top reason PMI ranked Phoenix as the #2 riskiest market in America.

Phoenix has seen the biggest drop in the rate of appreciation of all 50 MSAs, from 37.33 percent in Q1’06 to 4.52 percent in Q1’07, and its volatility is the highest in the country. While in-migration from California has slowed, reducing upward pressure on home prices, affordability continues to drop. Unemployment remains below its long-term average, somewhat offsetting these risk factors.

I think PMI gave too much weight to the change in appreciation (“Acceleration”) and so they overestimated the risk in the Phoenix market.

Compare the most recent appreciation in Phoenix to that in Detroit, and the risk PMI estimates in both cities.

Detroit prices went DOWN 2.98% in the year while in Phoenix prices actually increased 4.52%. Nevertheless, PMI estimated the chance that home prices will be lower in two years in Detroit were only 28% while the odds of a price decline in Phoenix was 65%.

I don’t buy it. I don’t think Phoenix faces twice the odds of a price decline. That’s silly.

The problem with the model is that those cities with the most appreciation will be the cities with the greatest deceleration a year or two later on.

My prediction is when the formerly hot markets of Seattle and Portland cool off, that “deceleration” will boost them in the new PMI rankings ahead of Phoenix and Phoenix will drop back into the upper middle of the pack.

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