Recession to Tackle High-Flying Housing Markets

On the cusp of another NFL training camp, Redfin is speculating that Cleveland and Buffalo are most resilient. Not as respected football franchises – although they are – but as housing markets, where homeowners stand to lose less ground from recent home-price appreciation.

Redfin’s report said the high-flying migration destination cities that lit up the pricing board lately, such as some Sunbelt and work-from-anywhere markets, are most susceptible in a recession.

Redfin senior economist Sheharyar Bokhari said in prepared remarks, “If the US 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.”

Riverside, Calif.; Boise; Phoenix and Tampa are among the markets where homeowners stand to lose some of the value that they gained over the past two years. 

Joseph Ferrara, principal, BFC Partners, tells GlobeSt.com, “As developers, we have shifted our focus to the Northeast, and specifically to Buffalo, where the need for subsidized affordable units is wholeheartedly welcomed. Investing and developing in a relatively affordable city, we feel, provides shelter for those in need of stabilized housing, protects BFC from venturing into a risky and unstable market, and builds our development pipeline for years to come.”

Recession Fears are Escalating

Since spring, the housing market has been rocked by higher home buying costs, particularly mortgage rates that approached 6% before mostly retreating the past month.

Bokhari added, “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.

“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. 

“First, what goes up must come down. Home prices soared at an unsustainable rate in many pandemic home buying 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.”

He said that even in the most vulnerable parts of the country, “most homeowners are likely to remain on solid footing. Home values may drop from the peak they reached in 2021 and early 2022, but the decline is only on paper for homeowners who are staying put for at least a few years, as values typically increase over time.”

‘Meaningful’ Supply/Demand Imbalance

Cadre investment specialist, David Vincent, tells GlobeSt.com, “Whenever you have a sharp increase in demand at a local market level you expect to see prices rise as well. We already know that there is a meaningful supply/demand imbalance throughout the country and any short term increases in demand will only exacerbate that imbalance. The good news is that lending standards remained strong throughout the pandemic which limited the ability for pure speculative buying on a large scale.

“It’s possible that a recession will bring prices down in some markets, especially ones that have seen sharp price increases recently. However, I think that the impact of a recession as well as higher mortgage rates will most likely lead more people to stay put and move less. Sellers often anchor on recent sales prices and are hesitant to cut their own price unless they have some urgency – loss of a job, need to relocate, health issues, etc.”

Make Moves When Others are Uncomfortable

Erin Sykes, real estate advisor, NetSeekers International, chief economist, LEED AP, tells GlobeSt.com that housing affordability—rising mortgage rates have increased the monthly payment on the median home by more than 55% in 2022 as the Fed attempts to cool an overheated housing market – affects single-family home sales more in a geographical sense.

“Not all markets are equal,” Sykes said. “Real estate is local, but macro charts tend to generalize all price points and geographies.”

She said given her field experience, she asks:

Is inflation persistent? Yes

Are rates increasing? Yes

Are budgets shifting? Yes

Is a negative wealth effect in play? Yes

Is there opportunity? Also, Yes

“Buyers finally have a chance to take their power back,” she said. “Both consumer and investor sentiment are near all-time lows. These low expectations set the stage for positive surprises and negotiability.”