The writing is on the wall.
As inflation hits its highest level in 40 years, interest rates are on the verge of reach seven percent by the end of the yearwith mortgage demand hitting a 22-year low and home sales slipping to pre-pandemic lows, it’s likely a downturn — major or minor — is afoot.
“Recession fears are mounting, primarily because the Fed has signaled it will continue to raise interest rates to keep inflation under control and calm consumer demand. Rising interest rates have led to a spike in mortgage rates, which has already cooled the housing market,” red fin Senior Economist Sheharyar Bokhari said Tuesday in the brokerage’s latest market report.
While this recession won’t rival the Great Recession, Bokhari said that doesn’t mean homeowners will emerge completely unscathed.
“But a recession – or even a continued economic downturn that does not reach recession levels – would have a greater impact on some local housing markets than others, and there are a few factors that put certain areas at risk” , he explained.
According to Redfin’s analysis of the 98 major US markets, California and Florida have the most to lose in the recession based on current house price volatility, average debt-to-income ratio and price growth trends. houses.
Riverside, California has the highest downside risk, with a score of 84 out of 100. Throughout the pandemic, primary and secondary home buyers from Los Angeles and Palm Springs have flocked to the area in the hope to take advantage of falling house prices.
However, the surge in demand has created “highly volatile” growth in house prices – a benefit for sellers who have garnered offers five to six figures above the value of their home, but a risk for buyers who probably wouldn’t be able to make the same profit in the future.
“What goes up must come down,” Bokhari said. “Home prices have climbed at an unsustainable rate in many pandemic homebuying hotspots. Additionally, places where people tend to have high debt relative to their income and home equity are vulnerable because their residents are more likely to foreclose or sell at a loss.
The markets most at risk of a downturn are across the price spectrum, with relatively affordable Boise, Idaho (76.9) securing second place ahead of more expensive locales including Cape Coral, Florida (76.9). .7), North Port, Florida (75) and Las Vegas (74.2) and Sacramento, California (73.1).
“The Boise market is already recovering as many people who moved to Idaho during the pandemic are returning to their hometowns or cashing in and moving to more affordable locations,” said Boise Redfin agent Shauna Pendleton. . “The housing market was hot during the pandemic, largely due to out-of-town buyers.”
Pendleton noted that the median home price in Boise skyrocketed from $330,000 to $550,000 from May 2020 to May 2022, providing homeowners with unseen benefits. However, as the market slows, she said owners are struggling to come to terms with the end of a two-year glorious era.
“Sellers ask me if California cash buyers are still around, hoping they’ll rush in and offer to buy their home for more than the asking price – but that doesn’t happen much anymore, and cash buyers that are on the market often offer below asking price,” she said. “I don’t expect home values to drop, but we have to come down from the clouds at some point. given and sellers must adjust their expectations to the new reality: there are more houses on the market, fewer buyers and a higher price. lucky buyers can’t afford the asking price because their monthly payments have gone up due to rising rates. »
“But buyers have more choice, less chance of getting into a bidding war, and more time to make important financial decisions,” she added.
On the other end of the spectrum, affordable Rust Belt markets are primed for an economic downturn. Although these markets have seen some growth during the pandemic, they have been relatively neglected in favor of places with more conveniences.
Akron, Ohio has the least chance of a real estate downturn with an overall risk score of 29.6, followed by Philadelphia (30.4), Montgomery County, Pennsylvania. (31.4), El Paso, Texas (32.2) and Cleveland (32.4). Cincinnati (32.6), Boston (32.6), Buffalo, NY (33.1), Kansas City, Missouri (33.4), and Rochester, NY (34).
“Nearly all of these metros are affordable with prices rising relatively slowly, two factors that would help their housing markets through a recession,” the report explains. “Prices rose more slowly than the national median in nine of the 10 most resilient metros (El Paso is the exception).”
Seven of the 10 low-risk markets had median prices below $300,000, which Redfin says will help buyers stay active even during a recession.
“Affordability helps housing markets in a downturn because it means people are more likely to be able to buy homes, and those places can attract people from out of town to the search for lower prices,” the report noted.
Despite growing economic concerns, Bokhari said most homeowners are in a financial position to emerge from a recession relatively safely.
“If the United States enters a recession, it is unlikely that we will see a housing market crash like in the Great Recession, because the factors affecting the economy are different: most homeowners have a good net worth of their house and little debt and unemployment is low.”
Email Marian McPherson