Last week, PMI Group, of private mortgage insurance fame, released its “risk index” rankings for U.S. major metropolitan areas for the 4th quarter of 2007. PMI’s risk index measures the likelihood that housing prices will be lower in two years than they are now. As the map above shows, Phoenix, Las Vegas, and well, pretty much all of Florida and California were the big winners with the highest probability of declining prices over the two year period (i.e. the highest risk index). PMI’s Risk Index derives the probability by considering the amount and rate of recent historical appreciation and price volatility, housing affordability, and other local economic conditions including unemployment rates.
Does a high likelihood of price declines translate into putting the breaks on investment purchases there? I don’t think so. While price declines impact returns and the possibility or even probability needs to be considered, the risk of any real estate investment and the resulting returns will be determined by the price at which you buy your investment, not price movements in the market as a whole. For our part, we continue to keep a close eye on market rents to determine price, and we hope to find even more opportunity during the difficult markets.
If you would like to read more detailed information about PMI’s Risk Index and the areas depicted above, you can find the full report here.