Report: Real estate bubble may burst within next 2 years

By RACHEL RASKIN-ZRIHEN, Times-Herald staff writer
Vallejo Times Herald

Vallejo's is among the nation's riskiest real estate markets, according to a new analysis by a California mortgage insurance firm.
The Vallejo/Fairfield area has a nearly 48 percent chance of seeing real estate prices drop in the next two years, the report indicates. But, says Solano Association of Realtors president Corrine Oakes, that means there's a better than 50 percent chance they won't.

In Napa, odds are better than 50-50 that home prices will drop in the next two years, the study shows. Napa's 54 percent chance is barely beat by Boston, which tops the list with 55 percent.

When home prices become unnaturally inflated and outpace most people's ability to afford a home, prices may start falling, said Beth Haiken of PMI Group, which released the study.

"Home price appreciation has just been very, very strong in the last five years. They've gone up 83 percent in five years in the Pacific region and 70.3 percent in New England," Haiken said.

California tops the 10 states most at risk for a housing price decline, containing six of the riskiest areas, the study shows. These areas include Oakland, San Francisco/peninsula, San Jose, San Diego, Santa Ana and Riverside.

Haiken said the study looks at three predictive factors - home price appreciation, the labor market and home affordability - to determine an area's risk of falling home prices.

The information is taken from the Office of Federal Housing Enterprise Oversight, Bureau of Labor Statistics employment data and an Affordability Index that PMI developed.

"We look at the median home price compared to what it was in 1995, and how much of a difference there is between the average income and housing costs," Haiken said. "When those numbers get way out of balance, (the market) starts to get risky."

Haiken said that while the Vallejo area has experienced significant real estate appreciation in the past several years, the area's employment growth is good.

"The affordability leg is weak, though," Haiken said. "When home prices start to outstrip incomes by so much, you begin to see changes in the market."

The Boston and San Diego metro areas each have a better than even chance of seeing real estate prices decline in the next two years, according to the study. Those figures put Boston first and San Diego third in the company's listing of the nation's riskiest markets.

There is a 1-in-5 chance of declines in the Washington area. All three areas have seen rapid increases in home prices in recent years, and the PMI analysis suggests they might not be sustainable.

Historically, the market seeks to correct that kind of disparity, usually by bringing down home prices, since incomes rarely rise to meet home prices, Haiken said.

"There's a herd mentality in real estate - when they sense problems, they stay away," Haiken said.

Haiken said the study only predicts the direction of any likely market change, not its severity, she said.

At a better than 47 percent chance of a decline, the Vallejo area's risk is near the top, Haiken said.

Oakes, though, said local experts aren't too worried.

"No one locally is predicting a decline in home prices," she said. "We expect maybe a slowing of the increases."

PMI calculates its risk index using a computer model that takes into account current home prices, economic conditions and interest rates.

It found increasing risk in 36 of the nation's 50 largest markets, and a risk of 21 percent that the nation's median home price would fall in the next two years.

Making the list of the least risky states for a predicted housing price decline are Washington, Idaho, Wyoming, Utah, New Mexico, North Dakota, Oklahoma, Arkansas, Mississippi and Alabama.