The writing is on the wall.
With inflation breaking 40-year highs, interest rates poised to reach seven percent by year’s end, mortgage demand hitting a 22-year low, and home sales sliding to pre-pandemic lows, it’s likely a downturn — major or minor — is on the way.
“Recession fears are escalating, mostly because the Fed has signaled it will continue to raise interest rates to tame inflation and cool consumer demand. Higher interest rates led to surging mortgage rates, which have already cooled down the housing market,” Redfin Senior Economist Sheharyar Bokhari said in the brokerage’s latest market report on Tuesday.
Although this recession won’t rival the Great Recession, Bokhari said that doesn’t mean homeowners will come out completely unscathed.
“But a recession — or even a continued economic downturn that doesn’t reach recession levels — would impact some local housing markets more than others, and there are a few factors that put certain areas at risk,” he explained.
According to Redfin’s analysis of the U.S.’s top 98 markets, California and Florida have the most to lose in the recession based on current home-price volatility, average debt-to-income ratio and home-price growth trends.
Riverside, Calif. has the highest downturn risk, with a score of 84 out of 100. Throughout the pandemic, primary and second-home buyers from Los Angeles and Palm Springs flocked to the area hoping to take advantage of lower home prices.
However, the boom in demand created “highly volatile” home price growth — a benefit to homesellers who garnered bids five to six figures above their homes’ value, but a risk for homebuyers who’d unlikely be able to make the same profit in the future.
“What goes up must come down,” Bokhari said. “Home prices soared at an unsustainable rate in many pandemic homebuying hotspots. Additionally, places where people tend to have high debt compared with their income and home equity are vulnerable because their residents are more likely to foreclose or sell at a loss.”
Markets most at-risk of a downturn are across the price spectrum, with relatively affordable Boise, Idaho (76.9) securing the No. 2 spot ahead of more expensive locales including Cape Coral, Fla. (76.7), North Port, Fla. (75) and Las Vegas (74.2) and Sacramento, Calif. (73.1).
“Boise’s market is already turning around, as a lot of the people who moved to Idaho during the pandemic are either moving back to their hometowns or cashing in and moving to more affordable places,” Boise Redfin agent Shauna Pendleton said. “The housing market was hot during the pandemic, largely because of out-of-town buyers.”
Pendleton noted the median home price in Boise exploded from $330,000 to $550,000 from May 2020 to May 2022, giving homeowners unseen profits. However, as the market slows down, she said homeowners are struggling to accept the end of a two-year heyday.
“Sellers are asking me if the cash buyers from California are still around, hoping they’ll swoop in and offer to buy their home for more than the asking price–but that’s not happening much anymore, and the cash buyers who are in the market are often offering below the asking price,” she said. “I don’t expect home values to plummet, but we do need to come down from the clouds at some point and sellers need to adjust their expectations to the new reality: There are more homes on the market, fewer buyers, and a higher chance that buyers can’t pay the asking price because their monthly payments have shot up due to rising rates.”
“But buyers have more to choose from, less likelihood of entering a bidding war and more time to make major financial decisions,” she added.
On the other end of the spectrum, affordable markets across the Rust Belt are primed to breeze through an economic downturn. Although these markets experienced some growth during the pandemic, they were relatively overlooked in favor of locales with more amenities.
Akron, Ohio has the lowest chance of a housing downturn with an overall risk score of 29.6 followed by Philadelphia, (30.4), Montgomery County, Penn. (31.4), El Paso, Texas (32.2) and Cleveland (32.4). Cincinnati (32.6), Boston (32.6), Buffalo, NY (33.1), Kansas City, Mo. (33.4) and Rochester, NY (34).
“Nearly all of those metros are affordable with relatively slow-increasing prices, both factors that would help their housing markets in the face of a recession,” the report explained. “Prices rose slower than the national median in nine of the 10 most resilient metros (El Paso is the exception).”
Seven of the 10 markets with low-risk scores had median home prices below $300,000, which Redfin said will help homebuyers stay active even during a recession.
“Affordability helps housing markets in a recession because it means people are more likely to be able to buy homes, and those places may attract people from out of town looking for lower prices,” the report noted.
Despite rising economic anxieties, Bokhari said most homeowners are in the financial position to come out of a recession relatively secure.
“If the U.S. does enter a recession, we’re unlikely to see a housing-market crash like in the Great Recession because the factors affecting the economy are different: Most homeowners have a fair amount of home equity and not much debt and unemployment is low.”
The top 10 at-risk markets | Credit: Redfin
