Housing Market: A Risk to Economy?

Orange County is the sixth riskiest major housing market in the nation.

Or so says fresh rankings from one major player in the California mortgage game, according to the Orange County Register.

Believe it or not, this ranking is a noteworthy improvement.

PMI Group, the mortgage insurance giant, revamped its housing risk metrics that are based on local pricing trends and regional economics.

When you’re like PMI, the Register notes, and in the business of protecting lenders and mortgage investors from themselves, you’d better be up-to-date on what’s happening in housing markets.

Under the old formula, last used six months ago, PMI had Orange County as the second riskiest housing market among the nation’s top 50, just behind San Diego.

So No. 6 with the new math - behind the Inland Empire, Las Vegas, West Palm Beach, Fla., Los Angeles and the Phoenix housing market - is progress.

And let’s remember, too, that housing risk is a measure of possibility, by no means a guarantee that home mortgage disasters lie ahead.

Mark Milner, Private Mortgage Insurance’s risk tabulator, says Orange County is challenged with an expensive, volatile housing market that’s seen a dramatic drop in home appreciation.

“The good news is that unemployment is very low,” Milner says. “That’s good support to the market.”

This kind of signal puzzles economists at UCLA, who issued a latest statewide forecast Tuesday. Their outlook suggests an overall California housing market sluggishness for the remainder of 2007 that continues throughout 2008.

As the professors put it, “in spite of all this bad news from real estate, the wider California economy is mostly unfazed.”

PMI’s rejiggered take on risk basically weighs a region’s recent price performance, affordability of housing in a specific area, and local rates of unemployment.

Tracking the volatility of that price performance - the latitude of the ups and downs - was the driver within this new housing market math.

PMI’s research suggests that the greater the historical fluctuations in a market, essentially, the larger the chance for home price drops. It sort of a “no pain, no gain” logic because for a market to be volatile, it’s got to go up pretty frequently.

Look at Pittsburgh, for a moment.

This is a city with the second lowest volatility among the 50 large markets tracked by PMI - right behind Cincinnati. It’s also a town where the phrase “real estate riches” is rarely uttered.

Veteran Orange County housing market watchers, people who’ve ridden out previous bouts of intense price fluctuations, may be amused by the math.

It finds that there are 12 other major markets in this country that have suffered more volatility than here.

That helped push the O.C. down the risk rankings. But does that mean its risk of bad credit mortgage disaster is really abating in any form?

Let’s be honest. Any volatility measure is a chunk of serious statistical gymnastics that will befuddle all but the geekiest of math wizards. But think of it this simple way: How might everyday people feel when the value of one of their largest assets acts like a ping-pong ball?

“People certainly react to the direction (of the market),” Milner says.

When prices are soaring, as they did in many markets for much of this decade - until recently - real estate’s a simple game.

“Such high appreciation, it bailed out all problems,” says Milner of risky house bets made by buyers and lenders alike.

Continue reading in the Orange County Register …