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Pandemic homebuying hotspots at greater risk for a downturn

Redfin report finds that markets with high home price growth and a large influx of pandemic buyers would see largest impact of a recession

Pandemic homebuying hotspots with steep home price appreciation are the most susceptible to a housing market downturn if the U.S. enters into a recession, according to a recent report from Redfin.

The report found that popular migrations such as Boise, Idaho, Phoenix, and Tampa are the most likely to feel a big impact if gloomy economic scenarios materialize.

“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,” Sheharyar Bokhari, Redfin’s senior economist, said in a statement. “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 researchers looked at 98 U.S. metropolitan areas and focused on home-price volatility, average debt-to-income ratio and home-price growth. Metro areas were the assigned an overall risk score of 0-100, with 100 being the highest likelihood go a housing market downturn and 0 being the lowest likelihood.

“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,” Bokhari said. “First, what goes up must come down. Home prices soared at an unsustainable rate in many pandemic homebuying hotspots, both with second-home buyers and remote workers permanently relocating who were taking advantage of record-low mortgage rates. 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.”

With an overall risk score of 84, Riverside, California has the highest change of seeing its housing market cool down further if the country enters a recession. According to Redfin, the metro has very volatile home prices and it was a hot destination during the pandemic.

Rounding out the top two are Boise, Idaho with a score of 76.9, followed by Cape Coral, Florida (76.7); North Port, Florida (75); Las Vegas (74.2); Sacramento, California (73.1); Bakersfield, California (72.2); Phoenix (72); Tampa, Florida (70.7), and Tucson, Arizona (70.1). 

Of the top 10, six were among the most popular destinations for users moving from metro to another. In addition, Maricopa County, which is home to Phoenix, and Riverside County, gained more relocating residents than anywhere else in 2021, according to data from the U.S. Census Bureau.

Many of these metros have also experienced incredibly high year over year home price appreciation, with only Sacramento recording a home price growth rate slower than the national median.

Redfin notes, however, that home type will most likely play a role in if and how much of a price decline in these metros, as “large, single-family homes in streak-out neighborhoods tend to hold their value best in a recession.”

On the other end of the spectrum, with an overall risk score of 29.6m Akron, Ohio is the metro area with the lowest change of a housing downturn if the U.S. enters a recession. The report cites, Akron’s relatively low home-price volatility, low debt-to-income ratio, relatively few second homes and the fact that homes there are unlikely to be flipped, as the main reasons for its resiliency.

Philadelphia ranked second with an overall risk score of 30.4, followed by Montgomery County, Pennsylvania (31.4), El Paso, Texas (32.2), Cleveland (32.4), Cincinnati (32.6), Boston (32.6), Buffalo (33.1), Kansas City, Missouri (33.4), and Rochester, New York (34).

The majority of these metros are in the northern part of the U.S. either in the Rust Belt region or the East Coast. Except for El Paso, prices rose slower than the national median in these metros, and nine of the metros had a median sale price lower than the national median of $431,000 in May.

Looking ahead, Redfin recommends that homeowners ,who are considering selling their homes and who live in metro areas that are more likely to see a housing market downturn in the event of recession, list their properties soon to avoid any potential price declines. However, agents in these metro areas see a potential silver lining for some homebuyers.

“Even if higher rates mean buyers need to look at less expensive homes, they’re still likely to get a better deal than a year ago because homes aren’t being bid up way over the asking price,” Shauna Pendelton, a Boise-based Redfin agent, said in a statement. “And if home prices do decline, more people will be able to afford homes in places where they may have been priced out at the height of the buying frenzy.”