If the U.S. economy goes into recession—which seems likely with persistent inflation and a stumbling stock market—some housing markets are more vulnerable than others.
Popular migration destinations like Boise (ID), Phoenix (AZ), and Tampa (FL) are already feeling it, with many new arrivals cashing in and leaving for more affordable metros.
Knowing about vulnerable markets is equally as important as learning about emerging markets. What makes one market more at risk is often the flipside of what makes another resilient.
10 Markets most likely to see a downturn
Redfin analyzed 98 metro markets across the U.S. And some are at a higher risk of a downturn.
Redfin’s analysis combined 10 indicators to determine an overall risk score for each metro, with the highest score being 100 and the lowest score 0. The indicators, each weighted equally, are:
- Home price volatility
- Average debt-to-income ratio
- Average home-loan-to-value ratio
- Labor market shock
- Percent of homes flipped
- How much the housing market is “cooling” compared with other metros
- Year-over-year change in domestic migration
- Share of homes in the metro that are second homes
- Year-over-year price growth
- Elasticity of supply
Based on the above indicators, the ten metros most at risk are:
So, what makes the ten housing markets listed above more susceptible to a downturn?
For starters, the dramatic rise in housing prices in pandemic hotspots was not sustainable. Now the market is regaining some of the equilibrium it lost during the rush on housing.
That doesn’t lessen the fears about inflation and the growing cost of everything. But it does help explain what we’re seeing.
The Fed has signaled its readiness to continue raising interest rates to fight inflation and cool demand. Higher interest rates lead to higher mortgage rates, which puts a damper on home sales.
Another key factor is a high debt to income ratio in these at-risk areas, which means a higher rate of foreclosures. Homeowners struggling with debt—along with higher costs across the board—are also more likely to sell their homes at a loss.
What else do these markets have in common?
Six out of the ten most at-risk markets are also among the most popular destinations for those moving from one metro to another, hence the steep rise in housing prices. Several went from affordable to not-so-affordable, thanks to their popularity boost during the pandemic.
According to the U.S. Census, more people moved to Maricopa County (Phoenix) and Riverside County than anywhere else in 2021.
North Port, Florida saw its housing prices increase 30.5% year-over-year in May, followed by Tampa (28.1%) and Las Vegas (26.8%).
The faster the downturn, the harder it is for sellers to adjust their expectations on pricing to the new reality. That’s where it helps to have a real estate agent who knows the data and can help them put all these changes into perspective.
The upside of downturns
There are some upsides to the downturns facing these markets. The housing market overall is becoming more balanced; it’s recovering from an unusual situation that caused dramatic and unsustainable gains.
Also, as The Broke Agent pointed out on a recent episode of the Over Ask Podcast, the current market is more fun to talk about. This market will weed out agents who joined the industry thinking it would be easy. Easy doesn’t lead to sustainable growth.
And while prices are high, the market offers buyers some advantages.
A slowdown could lead to a moderation in mortgage rate gains, according to a statement by George Ratiu, senior economist at Realtor.com.
Combined with the increase in housing supply, we could see improved opportunities for homebuyers later in the year. The bottom line is that we are seeing a welcome shift for a housing market in need of a refresh.
What does this mean for real estate agents?
As a real estate agent, you’re responsible for knowing all the data relevant to your market and what that data means for your prospects. If you can’t help them make sense of what’s going on with housing prices, they’re not likely to buy or sell—or not with you, anyway.
What are you telling your clients about the market? And what makes you their secret weapon?