These California metros risk a real estate crash during the recession
Riverside, Sacramento are closest to the edge
The tide is turning in the California real estate market – and real estate agents who want to survive will need to invest in scuba gear.
Many of the markets at most risk of a full-fledged housing crash during the recession are located in California, according to a Redfin Analysis US real estate markets.
Here in Californiathe metros with the highest risk scores include, in order:
- Riverside (number one in the country in terms of real estate risk);
- San Diego;
- Stockton; and
What sets these areas apart from other parts of California?
During 2021 and the first part of 2022, these regions experienced high levels:
- loan-to-value (LTV) reports ;
- parts of overturned houses;
- the number of new residents in the area; and
- rapid (read: unsustainable) growth in house prices.
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 two years. When prices fall, thousands of people will be plunged into negative equity status.
Submarine owners don’t have a financial cushion when they have to sell due to a change in circumstances, such as job loss. The only answer is default and foreclosure. A growing number of troubled sales have put additional pressure on house prices, causing the tide to rise faster in these regional housing markets.
Riparian housing indicators
The weight of the recession on the California real estate market
In 2022, you may be surprised to learn that we are already in a undeclared recession.
Economy sends mixed signals, including two consecutive quarters of negative growth Gross Domestic Product (GDP)who is the unofficial arbiter of recessions. However, asset prices continue to make gains in the stock market and even in real estate (despite the slowdown in sales).
The continued security you may feel from rising property prices may make you expect any officially declared recession to pass with little impact, leaving the housing market unscathed.
It’s true, a recession doesn’t always mean trouble for the housing market. In fact, the pandemic responses pushed during the 2020 recession actually gave the California housing market a major boost. These supports included historically low interest rates spurred by the Federal Reserve (the Fed) and significant government stimulus.
But this time, don’t expect much help from Uncle Sam.
The Fed began raising its benchmark interest rate in March 2022, taking the federal funds rate from virtually zero to its current target rate of 2.5%.
All this was for the purpose of fighting against the highest consumer price inflation known since the early 1980s. The annual inflation index stood at 8.5% in July 2022, according to the Bureau of Labor Statistics (BLS). As inflation indicators remain well above the Fed’s inflation target, the Fed will continue to raise rates in the coming months.
The impact on mortgage interest rates has already been rapid and devastating for buyer’s purchasing powerthe 30-year average FRM rate rising from nearly 3.0% in early 2022 to over 5.0% in August 2022.
Current market rates
Since these economic issues affect everyone, this warning for high-risk areas like Riverside can be extended to the rest of the state.
Some early signs of danger: California home sales volume declined rapidly in 2022, defying the seasonal sales cycle to peak in early March 2022. With home prices barely rising in May 2022 after months of gains important, the fall in house prices is not far behind.
Prices may have jumped on the rocket fuel of low interest rates (and pandemic-induced buyer enthusiasm), but they will drop like a feather – gradually and over the next few years. Watch prices for a bottom around 2025, when the economy will be in its early stages of recovery from the 2022-23 recession.
Real estate professionals: Whether you are in Riverside, Sacramento or anywhere else in California, now is the time to prepare for the downturn in the real estate market.
Start by planning a return to underwater properties, arming yourself with knowledge about owned real estate (REO) and seizures. Think of this expertise as your scuba gear as homes fall underwater over the next two years – use it to survive and stay ahead of the competition.
How to prepare for the REO resurgence
Stay up to date on real-time housing market developments by signing up for the First Tuesday newsletter.