All eyes are on the next recession, forecasted to arrive in 2020. Already, housing professionals and other forward-thinking individuals are wondering: how will housing be affected with the next economic decline?
A recent Redfin report attempts to quantify the answer, predicting which U.S. cities are at risk of a housing downturn with the next recession.
Cities in California and Florida top Redfin’s list of highest-risk housing markets (for anyone paying attention during the 2008 recession, this may not surprise you). These markets have high price-to-income issues and more volatile markets. They also suffered the nation’s steepest losses during and following the 2008 recession.
In the Golden State, three Southern California cities stood out, with Redfin predicting a:
- 73% chance of a housing downturn in Riverside;
- 68% chance of a housing downturn in San Diego; and
- 64% chance of a housing downturn in Los Angeles.
At the national level, Riverside had the highest overall risk of a housing market decline during the next recession.
To arrive at their list, Redfin used the following metrics for each area:
- the median home sale price-to-income ratio;
- the average loan-to-value (LTV) ratio of homes sold in 2018;
- home price volatility;
- the share of flips;
- the amount of job diversity across industries (e.g. if everyone is employed in a single industry, the impact of a recession is predicted to be higher);
- dependence of the local economy on exports (important due to the growing trade war); and
- the share of households headed by a senior aged 65 or older.
The economy’s impact on housing, then and now
Even though economic indicators, such as the yield spread, are consistently pointing to a recession’s arrival in the coming 12 months, real estate professionals don’t need to completely panic. The next recession isn’t expected to be as harsh or elongated as the Great Recession of 2008, which had much of its roots in the overinflated housing and mortgage markets. In contrast, today’s housing market is not nearly as unstable, mostly due to increased regulation put into place in the aftermath of the 2008 recession.
But, to continue making a living during the slowdown, real estate professionals do need to prepare.
California home sales volume has slowed considerably in 2019, a slowdown that will continue in 2020, meaning agents will experience lower transaction volume. Along with fewer sales, home prices will decrease heading into the next recession, plunging many recent homebuyers into negative equity and increasing the share of distressed sales.
Notably, this downturn is happening not just in places like Riverside, San Diego and Los Angeles, identified by Redfin. It’s occurring consistently across California. Thus, agents everywhere need to prepare for less income and more challenges in the coming months.
In preparation for the challenges ahead, agents can take the following steps now:
- overproduce by working longer hours, chasing more leads and expanding your marketing efforts;
- build out your power base by increasing civic involvement and expanding your network;
- learn investment strategies through continuing education and by seeking out mentors who can help you become versed in different types of property investments that become more popular when prices drop during a recession;
- form investment groups with like-minded professionals by creating a real estate syndicate to take advantage of low prices; and
- consider taking on related work, such as property manager, mortgage lender or even upping your status to a full broker.