Central Valley cities are among the most likely in the nation to see further home price drops within the next two years, according to figures compiled by PMI Mortgage Insurance Co., the Walnut Creek-based subsidiary of PMI Group Inc. (NYSE: PMI).

There is a 62.3 percent chance of price declines in Stockton, says PMI. That's the third highest in the nation, it says, exceeded only by Salinas at 63.9 percent and Naples, Fla., at 66.1 percent.

For the nation's 50 largest metropolitan, the average score, weighted by population, translated into a 32.9 percent chance that prices will be lower in two years. The average risk score for the 50 largest MSAs was down 1.7 percentage points from the previous quarter, PMI says.

The index shows that declining home prices have improved affordability, which led to minor decreases in risk scores for most MSAs, it says.

"Home price appreciation rates have slowed significantly and have gone negative in some areas. This will cause some pain in the immediate future. But in order to restore a healthy market balance, prices need to come back in line with incomes," says Mark Milner, chief risk officer of PMI Mortgage Insurance Co. "The drop in appreciation rates and slight improvements in affordability caused the average risk score to decline 17 points, the first drop since the fourth quarter of 2004. Despite this slight drop, the risk of price declines remains high nationally, and particularly high in California, the Southwest, and Florida."

The rate of home price appreciation declined in the second quarter, says PMI. Since peaking in the second quarter of 2005, appreciation rates have decelerated in seven of the last eight quarters. At the end of the second quarter, prices appreciated at a year-over-year rate of 3.2 percent, a drop from the previous quarter's year-over-year rate of 4.5 percent.

Here's PMI's list of Central Valley cities' likelihood of price declines by this time in 2009:

• Bakersfield: 56.4 percent

• Chico: 41.8 percent

• Fresno: 48.1 percent

• Hanford-Corcoran: 41.2 percent

• Madera: 42.1 percent

• Merced: 59.3 percent

• Modesto: 57.0 percent

• Sacramento: 52.2 percent

• Stockton: 62.3 percent

• Visalia-Porterville: 53.3 percent

"What we found is that owning a home for ten years during that period was a good strategy to build wealth and increase net worth over the long term," says Mr. Milner. "The market's changing tide doesn't necessarily mean it is a bad time to buy or own a house, but it is a reminder that homeownership is a long-term investment. People who are considering buying, as well as those who already own, need to take the long-term view."

PMI says its index is a proprietary statistical model that measures geographic house price risk by predicting the probability that home prices in the nation's 379 largest metropolitan statistical areas and metropolitan statistical area divisions as measured by the House Price Index from the Office of Federal Housing Enterprise Oversight will be lower in two years. The conclusions are based on the OFHEO House Price Index, labor market statistics from the Bureau of Labor Statistics, and the PMI Affordability Index, which uses local per capita household income, home price appreciation, and a blended mortgage rate to calculate the local share of mortgage payment to income relative to its baseline year of 1995.