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What do you see as the trend in SFR construction starts in the second half of 2022?

  • SFR starts will decrease (72%, 116 Votes)
  • SFR starts will remain unchanged (17%, 27 Votes)
  • SFR starts will increase (11%, 18 Votes)

Total Voters: 161

Riverside, Sacramento are closest to the edge

The tide is turning in California’s housing market — and real estate agents who want to survive will need to invest in some scuba gear.

Many of the markets at greatest risk of a full-blown housing crash during the recession are located in California, according to a Redfin analysis of U.S. housing markets.

Here in California, the metros with the highest risk scores include, in order:

  • Riverside (number one in the country in terms of housing risk);
  • Sacramento;
  • Bakersfield;
  • San Diego;
  • Stockton; and
  • Fresno.

What makes these regions stand out from other parts of California?

During 2021 and the first part of 2022, these regions have seen high:

  • loan-to-value (LTV) ratios;
  • shares of homes flipped;
  • numbers of residents new to the region; and
  • rapid (read: unsustainable) home price growth.

For example, in Riverside, the average LTV ratio is relatively high, at 83%. This means there is very little wiggle room for homeowners who have taken out loans in the past couple of years. When prices drop, thousands will be plunged into negative equity status.

Underwater homeowners have no financial cushion when they need to sell due to a change in circumstance, such as a job loss. The only response is default and foreclosure. Rising numbers of distressed sales put additional pressure on home prices, causing the tide to rise faster in these regional housing markets.

Related article:

Riverside housing indicators

 

The weight of recession on California’s housing market

In 2022, you may be surprised to hear we are already in an undeclared recession.

The economy is sending some mixed signals, including two consecutive quarters of negative gross domestic product (GDP), which is the unofficial arbiter of recessions. However, asset prices continue to make gains in the stock market and even in real estate (despite slowing sales).

The ongoing security you may feel from rising real estate prices may have you expecting any officially declared recession to pass by with little impact, leaving the housing market unscathed.

It’s true, a recession doesn’t always spell trouble for the housing market. In fact, the pandemic responses pushed during the 2020 recession actually provided California’s housing market a major boost. These supports included record-low interest rates stimulated by the Federal Reserve (the Fed) and major government stimulus.

But this time around, don’t expect much help from Uncle Sam.

The Fed began pumping up its benchmark interest rate in March 2022, lifting the Federal Funds Rate from essentially zero to its present target rate of 2.5%.

This has all been in effort to combat the highest consumer price inflation experienced since the early 1980s. The annual inflation index stood at 8.5% as of July 2022, according to the Bureau of Labor Statistics (BLS). As inflation metrics remain well above the Fed’s inflation target, the Fed will continue to raise rates in the months ahead.

The impact on mortgage interest rates has already been swift and devastating to buyer purchasing power, with the average 30-year FRM rate rising from near 3.0% at the beginning of 2022 to over 5.0% in August 2022.

Related charts:

Current market rates

As these economic issues impact everyone, this warning for high-risk regions like Riverside can be extended to the rest of the state.

Some early signs of danger: California’s home sales volume has declined quickly in 2022, defying the seasonal sales cycle to peak early in March 2022. With home prices barely rising in May 2022 following months of significant gains, the drop in home prices is not far behind.

Prices may have leaped with the rocket fuel of low interest rates (and pandemic-induced buyer enthusiasm), but they will fall like a feather — gradually and over the coming years. Watch for prices to find a bottom around 2025, at which point the economy will be in its first stages of recovery from the 2022-2023 recession.

Real estate professionals: whether you’re in Riverside, Sacramento or anywhere else in California, now is the time to prepare for the housing market’s recession.

Start by planning for a return of underwater properties, arming yourself with knowledge on real estate owned (REO) properties and foreclosures. Picture this expertise as your scuba gear while homes fall underwater over the next couple of years — use it to survive, and stay ahead of the competition.

Related article:

How to prepare for the REO resurgence

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