The risk of continued price declines shrunk in most metropolitan areas studied by the PMI Mortgage Insurance Co. — the principal operating subsidiary of The PMI Group (PMI) — for its Q210 Economic and Real Estate Trends (ERET) report. The report finds that 93%, or 356, of 384 metropolitan statistical areas (MSAs) showed declining risk scores in Q409 compared with the previous quarter, while only one rose and the rest remained unchanged. “This is a significant change in the outlook for lower house prices, as the past couple of quarters showed a much smaller share of MSAs with declining Risk Scores,” wrote David Berson, chief economist and strategist at PMI, in the report. The number of MSAs in the riskiest category (90-100) fell by 26.4% during Q4, while those in the lowest risk category (0-10) surged by 79%. The risk score measures the probability that house prices will be lower in two years, based on a scale of zero to 100. PMI noted its risk index usually predicts future pricing trends with an average 80% accuracy. “Many of the components of the Risk Index caused this widespread decline in Risk Scores,” Berson wrote. “The most important factors were that housing affordability rose further to near historical highs (helped by extremely low mortgage rates), home prices have dropped sharply relative to incomes in most areas (and thus suggest that prices have fully, or more than fully, adjusted for their unsustainable increases during the housing boom), and some of the riskiest mortgage products were much less prevalent in new mortgage originations toward the end of 2009.” The number of MSAs with a risk score under 50 — indicating better-than-even odds of higher rather than lower house pricing in two years — grew by 26.5% to 186, from 147 in the previous quarter. At the same time, the number with scores over 50 dropped by 16.5% to 198 from 237: Among the top 50 MSAs in the US, the share of metro areas with a greater than 50% chance of further price declines by the end of 2011 fell to 64% from 82% in the previous quarter. By that same token, 36% of the top 50 MSAs — from 20% the previous quarter — have a risk score below 50, indicating a probability of higher prices in two years. Additionally, 40% of these MSAs showed a score improvement of 20% or more. “Although the risk index does not measure the magnetite of future declines, the forecast does provide encouraging signs for moderating probabilities of price declines for the remainder of 2010 and into 2011 among these largest MSAs,” PMI said in an e-mailed statement on the report. Write to Diana Golobay. Disclosure: the author holds no relevant investment positions.