Seattle Bubble

The latest report from the PMI Group has been released, and the news is increasingly bad for Seattle:

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As noted on the graph, PMI did improve their model with this latest report, so while Seattle’s new Risk Index of 343 is not directly comparable to its previous index of 167, the news still doesn’t bode well for Seattle home prices.

Of course, the local press puts the most positive spin possible on the news. The headline takes the cake: Home prices likely to hold steady, study suggests

Will the typical home cost less in two years than it does today?That’s the question a new study attempts to answer for the nation’s 50 largest metropolitan areas.

Seattle has a 34.3 percent chance of lower prices in two years — the 25th-highest risk and just under the population-weighted average of 34.6 percent in the summer U.S. Market Risk Index that PMI Mortgage Insurance Co. released Tuesday.

“This bodes well for the market there, in addition to the fact that Seattle has relatively really good affordability … and a solid employment market,” said LaVaughn Henry, director of economic analysis for PMI.
…
The changes to the PMI index, which led the company to skip its spring report, give additional weight to recent price volatility.

Seattle ranked 18th for price volatility, with a higher rank meaning more volatility.

From the perspective of many Seattle residents, home prices shot up quickly to very unaffordable levels. Affordability is down 4.9 percent from six months ago and 10.5 percent from a year ago, but Seattle’s affordability rank remained relatively steady, going from 23rd a year ago to 25th six months ago to 24th now, with a higher rank meaning homes are less affordable.

The likelihood of price declines in Seattle in the next two years, while low, is higher than it was six months and a year ago, although new changes in PMI’s model make comparisons less valid. The metro area’s chance of declines was 16.7 percent six months ago, putting it 32nd among the top 50 areas, and 10.9 percent a year ago, good for 33rd place.

But never mind all that. There’s never been a better time to buy. Get on the equity ladder now, any way you can.

(Aubrey Cohen, Seattle P-I, 06.19.2007)
(The PMI Group,Spring/Summer 2007 Report, 06.2007)

The latest PMI report (pdf) is out, and much to no one’s surprise, Seattle’s risk index has increased yet again.

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Jumping 14 points from the fall to a total of 167, Seattle now boasts a PMI that is 2.6 times its Summer 2005 low of 64. Although Seattle’s Risk Index is still a good margin below regions such as San Diego or Sacramento, it is certainly interesting to note that it has now increased in five of the last six PMI reports.

But don’t you worry, Seattle is special and all that. Surely price growth will simply stabilize, and the Risk Index will head back down.

(PMI Mortgage Insurance Co., Winter 2007 Report (pdf), 01.2007)

Mercer Island Guy pointed out that I haven’t yet posted on the latest PMI report that was released last week.

Rapidly slowing appreciation and declining affordability contributed to a marked increase in the risk of home price declines in cities across the country, PMI Mortgage Insurance Co., the U.S. subsidiary of The PMI Group, Inc. reported today, but strong economic fundamentals continue to underpin many areas.
…
[Chief Risk Officer of PMI Mortgage Insurance Co. Mark F.] Milner commented, “Over the past five years, house prices in the United States have appreciated more than 56 percent, on average, and much more in some areas. In the same time period, incomes increased just 25 percent. That’s why affordability has decreased so much in many areas. Going forward, house prices and incomes need to come back into balance so that more Americans can afford to buy homes without resorting to loans that expose them to interest rate risk and the risk of payment shock.”

For those that don’t know, PMI stands for Private Mortgage Insurance, and the PMI group is “one of the largest private mortgage insurers in the United States.” Although Seattle’s latest Risk Index of 153 is low compared to most PMI-tracked cities in California, it is worth noting that it has more than doubled from its Summer 2005 low of just 64.

Taking info from past PMI quarterly reports, I produced the following graph that shows Seattle’s Risk Index as well as Affordability Index for the last two years as calculated by PMI.

Just like I have been saying about inventory and sales, what I find most interesting is the trend. Decreasing affordability and increasing risk are not trends that I find particularly comforting.

(Press Release, PMI Group, Inc., 09.19.2006)