- The economy is reeling amid fears of an upcoming recession.
- As mortgage rates rise and uncertainty spreads, home prices have declined across the country.
- Home value downturns will escalate in the trendiest hotspots, while other markets will show more resilience.
Pandemic home buying hotspots like Sacramento and San Jose have thrived over the past few years. But as fears of an economic recession spreads, they are now most at risk of facing a housing downturn, according to Redfin.
“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,” Sheharyar Bokhari, a senior economist at Redfin, said in a housing report. “But a recession — or even a continued economic downturn that doesn’t reach recession levels — would impact some local housing markets more than others.”
Redfin researchers looked at several indicators to rank cities on their chances of a housing market downturn in the case of a US recession. The fear, in this case, is that as the broader economy tightens, some home values may decline leaving homeowners holding a mortgage for more than the value of their investment.
Bokhari says it’s most likely to happen in popular migration destinations as demand from relocators and second-home seekers tends to fall during an economic downturn — a trend that has already begun. According to Redfin, demand for vacation homes has already fallen significantly following last year’s pandemic-driven boom.
“As monthly mortgage payments skyrocket, buyers are quicker to back away from second homes than primary homes,” Taylor Marr, deputy chief economist at Redfin, said in a statement. This opens up the market for buyers that remain and leaves them room to negotiate lower prices.
With buyer demand waning, Redfin’s data shows cities with rapidly rising home prices are more at risk of downturn. However, less trendy and more affordable markets — mostly those in the Rust Belt region — remain resilient. This could mean real estate investments in these areas stand a better chance of weathering a housing slump if the US enters a recession.