08/27/08

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PMI forecasts additional price declines in South Florida

As if we didn't already know how shaky the South Florida housing market is, a new report gives us yet another reminder, ranking some local markets as among the nation's most risky and forecasting that prices will be lower even after two years have gone by.

PMI Mortgage Insurance Co., the Walnut Creek, Calif.- based company that provides residential mortgage insurance to lenders and investors, recently released its Winter 2008 U.S. Market Risk Index ranking the nation's 50 largest Metropolitan Statistical Areas (MSAs) according to the likelihood that home prices will be lower in two years. And the news isn't good for South Florida.

Five Florida MSAs – including three in South Florida – are ranked among the nation's riskiest 13 markets, according to the index. All but one are in PMI's highest risk rank, with a greater than 60 percent chance that home prices will be lower in two years.

"Florida is now adjusting to rampant investment by investors over the last five years," says LaVaughn M. Henry, PMI's director of economic analysis. "Prices went way beyond what a sustainable market could digest. Basically you're at the point where things just can't hold."

The Winter 2008 Risk Index is based on third-quarter Office of Federal Housing Enterprise Oversight data and covers only single-family homes. It indicates that risk remains largely concentrated in a number of MSAs in California and Florida, as well as Las Vegas and Phoenix.

The nation's riskiest market is Riverside-San Bernardino-Ontario, Calif., which has a 94 percent chance of seeing lower housing prices in two years. Rounding out the top three are Las Vegas-Paradise, Nev., and Phoenix-Mesa-Scottsdale, Ariz.

The riskiest South Florida market is Fort Lauderdale-Pompano Beach-Deerfield Beach, ranked sixth in the nation, with a 78 percent chance of price declines. That's up from a 47 percent risk in the second quarter of 2007.

West Palm Beach-Boca Raton-Boynton Beach ranked 10th, with a 71 percent chance of price declines, up from 51 percent the previous quarter. Miami-Miami Beach-Kendall ranked 13th, with a 58 percent risk, up from 38 percent in the second quarter of 2007. Miami is the only South Florida market not ranked at PMI's highest "risk rank." The risk of a price decline in the Miami market is from 40 to 59 percent.

"I'm surprised that Fort Lauderdale ranked as more risky than Miami," says David Levin, a housing industry analyst based in Delray Beach. "That market has a gazillion condos coming on line in the next nine to 12 months. If you look only at the single family, it's going to skew the numbers, but if you take in the entire housing stock, I can't help but think that this really understates the situation."

But Henry says that the Miami market is less risky because prices were still rising there – albeit at a low 3.44 percent rate – at the end of the third quarter of 2007, when he compiled the numbers. Conversely, in the Fort Lauderdale market, prices were dropping.

Unemployment is also a factor.

"Fort Lauderdale had just marginally better unemployment than Miami as of the third quarter," Henry says. "But Miami is – relative to its historical mean – doing much better in unemployment than Fort Lauderdale."

Florida ranks high on the PMI list due to both supply and demand factors, Levin says, and despite recent declines, housing remains unaffordable here.

"You have an overwhelming supply, which obviously is a contributing factor in pushing prices down," he says. "But with taxes and insurance costs through the roof – not to mention adjustable-rate mortgage resets – people are being clobbered. That obviously devastates demand."

The PMI Index is at odds with more optimistic projections released by industry-related organizations such as the National Association of Home Builders and the National Association of Realtors. For example, in a year-end housing forecast teleconference, NAHB Chief Economist David Seiders said that 2008 is the year that "various components of the housing market" will hit bottom and in which he anticipates a recovery in new-home sales starting in the second half of this year. That's assuming, he says, that the economy avoids recession, Congress passes reforms to address the subprime crisis, and the Fed remains ready to step in, if needed, to keep the economy moving forward.

According to Lawrence Yun, chief economist for NAR, the existing-home market appears to be stabilizing. "Just like the weather, there are large local variations in home prices," he says in an NAR news release issued on Dec. 31. But he cited price increases in nearly two-thirds of metro areas as evidence that existing home sales may be starting to recover.

But Henry stands by his forecast. "You're going to have a broad variance in opinion as to where things are going to go," he says.

Still, there is a glimmer of hope for South Florida. "There will be a market adjustment, but things will come back," Henry says. "There's one fundamental reason why: You can't build land. As long as we don't have the technology to do that, prices ultimately will rise because population grows."