[REN #795] Housing Market: Recession Risk for Some Markets

Picture of Open Door for Real Estate News for Investors Podcast Episode #795

The next recession isn’t expected to devastate the housing market like the last one, but a new analysis shows that some markets are more at risk than others. Redfin used several data points to analyze the risk and came up with scores for each metro that indicate ones are likely to get hit the hardest, and which will stand strong. (1)

Redfin says, the housing meltdown we saw during the Great Recession was not typical. Researchers pointed out, “Since 1980, there have been five official recessions in the United States. In all but the 2007 to 2009 Great Recession, inflation-adjusted home prices only declined an average of 2.7% from the month before the recession began to the final month of the recession.” That’s according to the Robert Shiller home price index.

Home prices tanked an average of 16.7% during the Great Recession, with peak unemployment at 10%. The second worst downturn for the housing market was in 1990. It lasted nine months with an average 6.7% drop in home prices and 7.8% unemployment. Redfin says, the Great Recession is a major outlier in the relationship between home prices and recessions largely because the overinflated housing market was its major cause. But the (current) housing market, which remains strong, is unlikely to be a culprit or victim of the next recession.”

Today’s Housing Market

So why is the current housing market so insulated from the potential impact of a new recession?

Redfin chief economist, Daryl Fairweather, says, “Home prices are high right now, but they’re high because there’s not enough supply to meet demand, which means there’s not a bubble at risk of bursting.” He says, “Most of today’s financed homeowners have excellent credit and a cushion of home equity, making them unlikely to default on their mortgage even if their weekly grocery bill grows or their stock portfolio shrinks in the next recession.”

Fairweather believes, if the U.S. is hit by recession in the next two years, it will be triggered by a global trade war. If that happens, he believes layoffs are most likely within industries that rely on exports, such as the automotive industry and the agricultural industry. Those homeowners may run into trouble paying their mortgages, and could be forced to sell their homes. He says that could bring home prices down in some markets, especially if potential homebuyers are also worried about job security, and become insecure about buying homes — in those markets. In markets that don’t rely on global trade, Fairweather believes that home prices will hold steady.

Dependency on exports was one of the factors that Redfin used to rank the metros. Researchers also looked at median home sale price compared to household income, average loan-to-value of homes sold during the last year, home price volatility, the number of homes that are being “flipped,” employment diversity, and the number of households led by someone 65 or older. They put all that data together and came up with an overall risk score for 50 different metros.

High Risk Metros

Redfin also put together a really nice map showing shades of blue for the metros with the lowest risk and shades of orange and red for those with the highest risk. (2) If you hover over any of the circles, you will get all the details for each city.

Most of the metros with the highest risk are in the West and the Sunbelt areas. But the metro that tops the list for risk is Riverside, California with a 72.8% overall risk score. Phoenix came in second with a 69.8% score. Miami is third with 69.5%.

These areas were also hit hard by the Great Recession. They are also areas with higher loan-to-value ratios and more investors flipping homes. Investor activity can drive prices higher so homeowners end up with a higher loan-to-value ratio than in other parts of the country. Other metros in the top ten high risk category include San Diego; Providence, Rhode Island; Tampa; Las Vegas; Los Angeles; San Antonio; and Orlando, Florida.

Low Risk Metros

 The metro with the lowest risk for a housing downturn is Rochester, New York. The overall risk score for Rochester is just 30.4%. Buffalo, New York is second on that list with a score of 31.9%. Hartford, Connecticut is third at 33.9%.

The other cities in the top ten low risk category are Cleveland; Raleigh, North Carolina; Chicago; Columbus; Milwaukee; New Orleans, and Minneapolis. San Francisco was the only city on the West Coast with a risk score below 50%. Price growth has already been slowing down in San Francisco which makes it less likely that we’ll see a big downturn there during the next recession.

Homes With Less Risk

In a different analysis, Redfin looked at the types of homes that will hold on to their value better than other homes. (3) Researchers identified five characteristics that were common among homes that held their value.

  1. Single-family homes did better than condos and townhomes – The average single-family home sold for 8% less during the Great Recession than afterwards, while townhome prices were down more than 9% and condos more than 13%.
  2. Homes in less dense areas did better than those in more crowded neighborhoods – Single-family homes in zip codes with the least density lost an average of 3.5% per year compared to an average of 10.4% for homes in the most dense areas.
  3. Homes with more bedrooms lost less value than smaller homes – Redfin says that homes with four bedrooms only lost 7% to 8% per year compared to homes with just two bedrooms. Those lost 10% to 13% per year. The study also shows that, in some cases, smaller units lost less value. It shows that studio condos did better than one-bedroom condos and one-bedroom homes did slightly better than two-bedroom homes. Researchers attribute that to the rentability of the smaller units.
  4. Two-story homes did better than single-story homes – This proved to be true for single-family homes, townhomes, and condos. Three-story homes did even better.
  5. Older pre-war townhomes did better than newer ones – This category compares pre-war townhomes built before 1930, late 20th century condos, and everything else.

These two reports show how variable the sub-markets can be, and with the inevitability of another recession — because we will be hit by one eventually — it’s good to know where you stand with your properties. But remember, most economists feel that the next recession will be much less severe than the last one, and will likely not include a housing meltdown. 


(1) Redfin Recession Risk Report

(2) Redfin Recession Map

(3) Redfin Report: How Recession Proof is Your Home?

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