There’s no question that housing markets have been on fire lately. New home starts have been running at the "unsustainable" rate of nearly two million per year. Sales of resale homes have also been brisk.

But how long can this record pace of sales and price jumps continue?

Well, that question is the subject of a study recently completed by the economists at PMI Mortgage Insurance Company, one of the largest private mortgage insurers in the United States. The results may surprise you, and perhaps impart a little more faith in the stability of your Atlanta real estate investment.

This particular study, called the PMI Risk Index, examines the local real estate market in the 50 largest metro areas of the nation. Their statistical model attempts to predict the likelihood that a specific area will experience a price decline over the next two years.

The data they used to make this determination is interesting:

* Next, the economists at PMI consulted the latest employment numbers for each of the metro areas, as reported by the Bureau of Labor Statistics. The idea is to spot signs of future price instability based on weak job growth or loss, and to find cities with strong job numbers as candidates for lowered price risk. The model’s estimated Risk Index increases as employment growth falls.

* Finally, the Risk Index authors calculate an Affordability Index. Their prior research has shown a strong relationship between steep price declines and areas where homes are simply unaffordable for the average worker. This procedure produces a number which is a measure of home affordability based on median household income, past home price appreciation, and the current 30 year fixed home loan interest rate. It defines the conditions that existed in 1995 as equaling 100.

This study brings together a remarkable amount of data, and the results are encouraging for us in the Atlanta area. Here are some highlights:

* Weakening affordability, fueled by low income growth and rapid price appreciation, has put New England, eastern New York, and California metro areas near the top of the risk list.

* Boston was found to be the riskiest housing market in the country, due to high prices and steep unemployment. The study points out that the Boston metro area has lost thousands of jobs in recent years, yet prices have continued to increase sharply. Combine that with a relatively low affordability rating of 83, and the Risk Index assigned a 53% probability that Boston real estate prices will experience a net decrease over the next two years.

* Also in the top ten riskiest metros were San Diego, San Jose, and Los Angeles, all with a Risk Index in excess of 40%. I am not sure I would want to invest in any city that had a 4 in 10 chance of seeing home prices decline over the next 24 months.

One surprise on the list was the overheated Las Vegas residential market, where home prices climbed a remarkable 54% during last year. The study acknowledges the steep price gains, but also factors in a strong local economy and powerful job growth and affordability numbers. Las Vegas ranked only 26 on the list of the 50 riskiest metro areas.

The good news for the Atlanta metro area is a combination of factors.

Ranked 32 on the overall list, Atlanta has seen home prices climb only moderately in recent years, with a 2004 price increase rate below 5%. This is in contrast to a national average of more than 10% for the same period.

In addition, Atlanta’s metro job situation has improved recently, with new jobs being added, but slowly. Our unemployment rate is not a negative factor in the equation.

But perhaps the strongest factor in our rating is the affordability of homes in the Atlanta area. Combining low interest rates with prices well below the national average, Atlanta ranks a high 115 on the affordability index, meaning that a higher percentage of our prospective buyers can actually afford to buy a home here than in many other cities.

Metro Atlanta’s assigned PMI Risk Index is 99. That translates into a likelihood of actual price declines over the next two years of only 9.9%, and that’s a number I think we can all live with.