The risk of price declines continues to intensify in markets where prices shot up the most during the boom, but is falling in most other markets, according to an analysis by PMI Mortgage Insurance Co.
PMI said the risk of price declines fell during the first quarter in 326 of the 381 metropolitan statistical areas (MSAs) tracked, or 86 percent. Of the 55 markets where PMI gauged the risk of price declines had increased, all but five were in California, Florida, Nevada and Arizona.
PMI’s U.S. Market Risk Index is based on home-price data, labor market statistics, housing affordability, household income, past trends in price appreciation, and mortgage rates. The index generates a score estimating the chance that home prices will be lower in two years.
PMI projects a 40 percent or greater chance that prices will fall in 16 of the 50 largest MSAs during the next two years. All but three of those markets — Las Vegas, Phoenix and Providence, R.I. — are in California and Florida (see chart).
PMI expects national home-price declines to continue into at least 2009, until excess inventory clears.
The large number of unsold units — the supply of new and unsold homes both exceeded 10 months as of April — is putting "significant downward pressure" on home prices. Builders will need to further reduce housing starts unless sales pick up again soon, as foreclosures and increasing inventories of existing homes will also depress new-home prices, the report said.
Based on first-quarter statistics, PMI rates the Riverside-San Bernardino-Ontario, Calif., MSA as having the greatest chance of lower prices in two years — 95.5 percent, up from 94 percent during the fourth quarter of 2007.
With the exception of Las Vegas, the risk of price declines increased in all of the 16 riskiest markets during the first quarter.
The sharpest increase in the risk of price declines was in the Miami-Miami Beach-Kendall, Fla., MSA, where PMI calculated the risk of price declines in two years at 84.8 percent, up from 70.4 percent in the fourth quarter of 2007. Other MSAs that saw sharp increases in the risk of price declines included Oakland, Calif.; Jacksonville, Fla.; West Palm Beach, Fla.; and Los Angeles.
The primary driver of the rise in risk scores was a continued increase in foreclosure rates, PMI reported, noting that California, Florida, Arizona and Nevada together represented 84 percent of the increase in foreclosures on homes with prime adjustable-rate mortgages during the first quarter.
But PMI, citing the Mortgage Bankers Association, said 20 states saw foreclosure starts decline in the first quarter, including Michigan, Ohio and Indiana. The risk of price declines is low and headed lower in many markets in those states and others that saw less abrupt price appreciation during the boom.
Detroit saw the greatest reduction in its risk index score among the 50 largest markets, falling from a 27 percent chance of lower prices in two years to 11 percent, PMI said. Other markets where the risk of price declines fell include: Providence, R.I.; Boston; Washington, D.C.; and Warren-Troy-Farmington Hills, Mich.
Detroit may have seen the biggest improvement in PMI’s Market Risk Index, but real estate professionals who work in that market told Inman News that times are still tough.
Agent Tyra Willis of A.I. Realty said that while prices have dropped "drastically" in the last two to three years, layoffs in the auto industry mean that most locals aren’t looking to purchase a home. Those who want to take the plunge are having trouble getting financing, Willis said.
"Most of those I have purchasing are coming from out of state and paying cash" for properties at deep discounts, Willis said.
Lenders are seldom willing to modify troubled borrowers’ loan terms, she said, which has resulted in a glut of foreclosed properties.
"It just seems like it’s a never-ending battle for us," Willis said. "There are two or three foreclosures on any block — not just in Detroit, but in the suburbs."
Citing numbers from the Office of Federal Housing Enterprise Oversight, or OFHEO, PMI says prices fell at the annual rate of 6.1 percent during the first quarter, compared with 4.44 percent in the fourth quarter of 2007.
Falling prices means smaller commissions, Willis said, making it harder to earn a living after paying marketing expenses and overhead. Willis said she’s been "doing leases galore" to generate income and build clientele for a recovery. But she’s also thinking about getting out of the business altogether, after four years as an agent.
Independent broker Jan Bond of Bond Realty LLC said he’s adapted to the current market by specializing in bank-owned properties in the metro Detroit area.
"I’ve been in the real estate market since 1985, and for the last two years, I’ve been dealing pretty much with REOs," Bond said. "From my perspective, I’ve seen the prices driven so low, you can’t pass up a bargain. I’ve had a house sell where the $3,000 commission — $1,500 each for the listing and selling agent — was more than the actual price of the house."
Bond said the banks he works with usually have a minimum commission of $1,500 for each side of the transaction.
"I keep telling them this is a crazy market, you have to offer bonuses to the agent," Bond said. "If they don’t follow that advice, these properties can sit for a year. The basements flood, (scavengers) steal the copper, there’s illegal dumping. If the water is running, you might have a $3,000 water bill."
Because he operates his business out of his home and has little overhead, Bond said he can get by on two closings a month, and putting together 20 to 30 broker price opinions for clients at $60 to $100 each.
"When you put it all together, I like to tell people I’m making a living, but I’m not making a killing," Bond said.
While PMI sees conditions in Detroit improving, the picture in Miami-Miami Beach-Kendall continued to deteriorate during the first quarter. According to OFHEO, prices in the MSA fell at an annual rate of 5.39 percent during the first quarter, compared with annual appreciation of 12.11 percent during the fourth quarter of 2007.
Mott Kornicki, broker associate at SIB Realty in Sunny Isles Beach, Fla., said prices in the region don’t have much more room to fall.
"The prices have already declined, and my opinion is we’ve seen the bottom already," Kornicki said. "The people who couldn’t afford to hold on are out already — they have either sold at a loss or walked away."
Many were speculators who, when they couldn’t flip a property, found it difficult to keep up on their mortgage payments, homeowners’ association dues and taxes.
"If they have a $6,000 mortgage, it’s $8,000 or $9,000 a month to carry that investment," Kornicki said. "If they’re lucky, they can find a tenant that, if it’s a really, really nice (condo), the most they would pay is $5,000 a month."
At night, he said, the lights are on in only 10 to 15 percent of the high-rise oceanfront condos near his office — an indication at how few are owner-occupied.
"Most of the people who are in a hard place are investors who got into the market out of greed, when the market was red hot," Kornicki said. "Things turned against them."
Buyers, however, are holding out for better prices, Kornicki acknowledged.
"The buyers that are out there, they read the news from different sources, and they see decline, decline, decline. They think they can buy for 50 cents on the dollar, but it’s not true," Kornicki said.
Complicating the picture is that in some oceanfront condo developments one seller will be trying to pull off a short sale at a deeply discounted price while another is asking a 10 percent premium over what they paid during the boom.
"I don’t know how the appraisers come up with a value, because the actual sales are so few and far between," Kornicki said. "It’s tough to make a living, but for the last two months I’ve seen an increase in the number of people looking to buy or invest in Southeast Florida."
Buyers who need financing, he said, are putting "30 percent down and keeping their fingers crossed they get approved."
One way Kornicki’s office is surviving the downturn is by finding tenants for clients, charging 10 percent of annual revenue or one month’s rent. He also hopes to do more broker price opinions, at $400 to $450 per report, by marketing his services on the Web.
Editor’s note: this story has been edited to correct that three markets outside of California and Florida, including Las Vegas, are among 16 of the 50 largest MSAs identified by PMI as having the greatest risk of price declines.
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