PMI's report adds the latest fuel to the fire in the ongoing debate about whether some of the country's housing markets are headed for a bubble and what the implications of that bubble may be. Economists and commercial real estate industry leaders have said that the prospect of a housing bubble has broad implications for commercial real estate, but they have also questioned the notion that a bubble is on the horizon.
San Diego is one of four California markets that have a greater than 50% chance of a decline in home prices, according to the PMI report. The others are San Jose, Santa Ana and Oakland.
"What we see in Southern California is that prices have increased much faster than incomes, so affordability is weakening," Mark Milner, chief risk officer with PMI Mortgage Insurance Co., tells Globest.com. Milner says that housing prices have appreciated more than 100% in the past five years in markets such as San Diego and Santa Ana. As a result, buyers require approximately 24% more income to pay for a median-priced house than in 1995.
"This kind of situation, where home prices are going up much faster than local incomes, is not sustainable. It is this imbalance, despite fairly robust local economic factors, that is a major driver of our view of risk in these areas," Milner says. The imbalance "is causing the current home price environment to diverge from long-term economic fundamentals, which cannot be sustained indefinitely," the PMI risk officer says.
Among real estate industry leaders who have challenged the predictions of a bubble in recent months is Sam Zell, chairman of Chicago-based Equity Group Investments LLC. At a panel in Beverly Hills this spring, Zell said the subject of a housing bubble was the one he's most asked by the media and one he believes "has been created by the press."
According to Zell, "you can't have a crash without an oversupply" of product. And he pointed to the tremendous gap between demand and supply to dispel that fear. Zell made another example to squash the idea of a potential housing bubble. He said although prices have continued to rise, sales have increased.
While others on the panel with Zell generally agreed, some suggested that the growing reliance on variable rate mortgages in California is worrisome.
Nationwide, there exists a 21.3% probability of an overall house price decline, as measured within the next two years and across the 50 largest housing markets, according to the newly released PMI Market Risk Index. Typically, the PMI Market Risk Index reveals risk along the coasts, though this assessment indicates non-coastal markets are at risk as well, Milner says.
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