California and Florida homes top risks for price drops

New home construction continues in Carlsbad, California June 24, 2008.

LOS ANGELES (Reuters) - California and Florida cities top the list of those under the risk of future plummeting home prices in the next two years, a report said Wednesday.

According to the PMI Fall 2008 U.S. Market Risk IndexSM, 17 of the top 50 metropolitan housing markets ranked in the highest-risk category were in California, Florida, Nevada and Arizona. These markets experienced an unprecedented boost in prices during the housing boom, and were consequently worst hit by the mortgage crisis.

Increases in foreclosure and unemployment rates have intensified the risk of home prices dwindling further, economists at PMI said .

The index, published since 2002 by a subsidiary of the PMI Group, Inc., ranks the nation's largest metropolitan areas according to the likelihood that home prices will fall in the next two years.

The risk of future price declines shot up by at least 10 percent in these 16 metropolitan areas from the previous quarter.

The index predicted the highest risk of future price declines in California's Riverside-San Bernardino-Ontario, (99.5 percent), and Florida's Fort Lauderdale-Pompano Beach-Deerfield Beach (99.5 percent), Orlando-Kissimmee (99.4 percent), Miami-Miami Beach-Kendall (99.3 percent), Tampa-St. Petersberg-Clearwater (99 percent).

"The risk of future home price declines increased in 94 percent of all 381 metropolitan statistical areas in the country this quarter," said David Berson, PMI's chief economist and strategist.

The sharpest increases in risk from previous quarters were seen in California's San Francisco-San Mateo-Redwood City (71.6 percent) and San Jose-Sunnyvale-Santa Clara (87.1 percent).

The index looks at several factors that could affect house prices, including the past history and the current trend of prices, rates of foreclosures and unemployment.

The homes prices, unemployment rates and income levels determine affordability of an average household. The report did not see any an improvement in the affordability for a family with an average income.

"While home prices have been falling in general in many areas, in the second quarter mortgage rates moved up, offsetting much of the benefit of the declining prices for potential home buyers," Berson said.

In these areas, home prices and mortgages rates must fall further for any improvement in affordability, Berson said.

In 60 percent of the nation's largest markets, homes have become less affordable that they were in 1995, and will increasingly move beyond consumer's reach in the next two years.

But a possible rescue plan that would help the Treasury Department buy toxic mortgage-related assets from banks could provide consumers confidence to return to the housing market.

"A rescue plan, in the near term, would likely add to market liquidity and add to confidence, both of which would be positive for the housing market, and as a result positive for home prices," Berson said.

The U.S. House of Representatives rejected a $700 billion rescue plan for the financial industry, stoking recession fears, on Monday.

(Reporting by Syantani Chatterjee; Editing by Bernard Orr)