All of these expenditures are worthwhile, and lenders seem anxious to lend money for these and other purposes. That’s because there is a general assumption that home prices will always go up, at least to some degree. The possibility that the value of one’s home could decline seems strange to us. But it’s a risk all homeowners must face.

PMI Insurance Company is also facing that risk. That’s because PMI sells mortgage insurance to buyers with down payments of less than 20% of their home’s purchase price. If home values were to fall, they could easily be left with no collateral for their loans, making the likelihood of financial loss much greater for them. Thus they, too, face this risk of declining values every day.

So it is no surprise that PMI conducts ongoing research into the likelihood that any particular metropolitan area may see a drop in home prices in the future, and publishes their findings quarterly.

Their most recent report, called the Winter U.S. Market Risk Index, shows that home price appreciation has slowed in 32 of the nation’s 50 largest housing markets, and that many of those markets face an increased chance of price declines over the next two years.

Economists at PMI take data on local economic conditions, income, and interest rates and blend that with other factors to estimate the possibility of a price drop. A value of 100 would imply a 10% probability of falling prices.

The median Risk Index value increased 25%, from 134 to 168, and there are now 11 metro markets with a greater than 50% chance of experiencing price declines, up from only 5 markets 90 days ago. As we have seen in the past, the riskiest markets appear on the coasts, including San Diego, which posted a 58% chance of price declines over the next two years. Boston, Long Island, and Sacramento were close behind.

Not surprisingly, these are many of the same markets that have seen rapid run-ups in home price over the past few years. The report found that price appreciation is slowing nationwide, but they stopped short of predicting overall national price declines.

Instead, PMI expects to see a continued gradual slowing of price increases, and looks for a soft landing for the real estate market, rather than the "bursting bubble" so often talked about. The report warns that the overall stability of the housing market could be threatened by economic shocks, unforseen events, or an adverse change in consumer sentiment.

The report notes that, by historical standards, home price appreciation in the range of four to six percent annually is considered normal.

The Atlanta metropolitan statistical area fared well in the risk category. With a risk index rating of 114, there appears to be about an 11% chance of declining home values in our area over the next two years. This places Atlanta well below the national average risk index of 261.

One of the primary reasons Atlanta’s risk index is so low is that our home price appreciation for the past couple of years has been reasonable and sustainable. Between fall of 2003 and 2004, the average home in the Atlanta area jumped only 4.70% in value. And between fall of 2004 and 2005, prices here jumped another 5.21%. In each period, our metro stayed well below national average appreciation.

The PMI report also calculates an "affordability index" for each of the top markets they study. Using median household income, home price appreciation and the current cost of a fixed rate loan, affordability is measured in terms of the change in the cost of buying a home since 1995. An index score above 100 means homes are more affordable than they were in 1995.

Even with ten consecutive years of price increases and the recent jumps in interest rates, Atlanta’s affordability score of 113 means it is easier for the average buyer to purchase today than eleven years ago. In February of 1995, the rate on a 30 year fixed rate loan was 8.83%, according to Freddie Mac, the mortgage funding giant.

Even though Atlanta emerged from the study in a strong position, some areas exhibited even less risk. The least risky markets in the U.S. were shown to be Nashville, Cincinnati, Indianapolis, and Memphis, with Pittsburgh last on the list at a score of 56.

The report goes on to suggest that this may be a good time for borrowers who carry adjustable rate loans to take their medicine and convert to the stability of long term fixed rate loans. With fixed rates predicted to rise by year end, those who stick with non-traditional loan programs may see higher interest costs in the months ahead.

I have posted the 12 page report in PDF format on my website at www.money99.com under "additional resources." It’s not only informative reading, but it makes me glad I own a house in Georgia rather than California.