URI expert questions study’s new findings
A national real estate survey calls Greater Providence the ninth most likely market to see property values drop, pointing out the region’s relatively slow job growth and double-digit property value appreciations.
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However, a Rhode Island economist says the study – released last month by national mortgage insurer PMI Group Inc. – fails to consider several factors, such as demand from out-of-state buyers, fueling the Providence real estate market’s sustained growth and strength.
Focusing on the nation’s 50 largest metropolitan areas, PMI’s study compares home prices, employment and housing affordability from the first quarter of 2005 to the same quarter in 2004.
The real estate report forecasts a 43.2-percent chance that property values in the Providence metropolitan area – which includes Fall River and New Bedford – will decline during the next two years. Why?
The area’s property appreciation gains were flat. Walnut Creek, Calif.-based PMI says property values in the Providence area, though up 14.45 percent during the year, improved a scant 0.19 percent from the previous year’s 14.26-percent hike.
The Providence area’s job growth made only small gains as well. Based on figures from the U.S. Bureau of Labor Statistics, the study says the number of non-farming jobs in the area grew by only 0.6 percent. Unemployment during the year was just less than 6 percent, more than 1 percent higher than traditional averages for the state, according to PMI.
PMI’s third factor used to assess risk is affordability, calculated using median income, home price appreciation and the 30-year fixed rate mortgage. This equation indicates that homeowners in the Providence area must use about 13 percent more of their total income to make mortgage payments than they did 10 years ago, said Beth Haiken, a spokeswoman for PMI.
Haiken said the quarterly risk study is distributed to PMI’s clients in the mortgage industry, and it’s used to gauge risks in major real estate markets. Only recently has PMI allowed the general public access to the report.
Yet how much stock should be put in PMI’s study?
Take the findings with a grain of salt, said Leonard Lardaro, a professor of economics at the University of Rhode Island. First, he said, people have forecast a downturn in the local real estate market for the same reasons in the past three years and it hasn’t happened.
PMI’s study assesses risk in real estate markets using information only from that geographical area.
“What you can’t do is presume that real estate in Rhode Island is just there for Rhode Islanders,” said Lardaro, who explained that a more regional approach must be taken because the state’s real estate boom is due largely to out-of-state interest from New Jersey, New York, Connecticut and Massachusetts.
Though it’s good that PMI uses the 30-year fixed rate mortgage to determine affordability, Lardaro said, the study should look closer at other factors such as interest-only financing that has increased the number of people who qualify for home mortgages.
“Yes Providence is a risky market because of appreciation,” Lardaro said, “but I have a really hard time believing that it is among the most risky in the country.”
Michael T. Young, Rhode Island Association of Realtors president, said the current housing shortage in the Providence market has fueled demand for homes.
In the past 10 years, Young said, 49,000 jobs were added to the Providence metro area while only 27,000 new homes were built.
Still, experts say a high amount of speculative real estate activity could cause property values to fall if, for example, increased interest rates slow market growth and cause investors to bail out of the market.
However, the number of properties for sale in Rhode Island has increased by 40 percent this past year, and prices still have jumped about 8 percent statewide, the economist noted. “I call that (market) strength.”
