All but two of the 50 largest local U.S. housing markets face an increased risk of falling home prices this quarter, but declines will be gradual, according to a report released on Wednesday.

A strong economy will allow the U.S. housing market, which has seen prices soar in recent years, to slow its rate of price appreciation, unless a shock slashes demand for homes, according to the report by PMI Mortgage Insurance Co., a Walnut Creek, California-based subsidiary of credit enhancement company The PMI Group Inc. (PMI).

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"The risk of price declines has increased somewhat, but the national and local economies remain strong, which should support a gradual return to an economic climate characterized by slow, steady appreciation," said Mark Milner, chief risk officer of PMI Mortgage Insurance.

"What we're anticipating is a soft landing nationally," Milner said, referring to home prices. "The markets will be coming back to their long-term average, which is a 4 percent to 6 percent (annual) appreciation rate."

Seven of the top ten markets most vulnerable to declining home prices are in California, which has routinely posted some of the strongest local housing markets as its economy rebounded from the long high-technology slump.

The San Diego regional market is at the top of PMI Mortgage Insurance's list. The region's home prices skyrocketed in recent years, making the market one of hottest in the nation.

Analysts have expected the San Diego market, where the California Association of Realtors pegged the median price of an existing single-family detached home at $608,770 in February, to run out of steam because home buyers can not keep up with both high prices and rising mortgage interest rates.

A similar affordability crunch is spreading as rates increase, raising the probability of declining home prices across the United States, according to PMI Mortgage's report.

On average the 50 biggest housing markets have a 28.7 percent chance of seeing home prices decline within the next two years, according to the report.

"The risks are going up nationally, but they're mitigated by a strong labor market and strong economy," Milner said.

San Diego is showing all the signs all the signs of slowing homes market, said Alan Gin, economist with the Burnham-Moores Center for Real Estate at the University of San Diego.

Homes for sale in San Diego are staying on the market longer and the pace of home sales is off from previous periods, Gin said. Additionally, he noted some home owners with adjustable-rate mortgages loans are struggling to make higher payments as interest rates rise.

"One of the reasons we had the housing market surging ahead was because of the low cost of borrowing money," Gin said. "With mortgage interests rates going up there is some concern some people will be priced out of the market, which in turn will reduce demand for housing ... That leads to lower prices."

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