Amid all the blaring national headlines of falling home sales and price declines, with all the anecdotes of listings that would have sold in hours last year sitting for months, against a background of increasingly likely recessionary conditions, the most important question for real estate professionals is, what matters most in your market?
The answer might be none of these things.
However badly pundits want to draw broad conclusions from national data, the truth is, every housing market is its own beast. Every state, every metro and every neighborhood is going to experience a pullback differently. For anyone who actually wants to make practical business decisions in reaction to these broad market movements, knowing the granular, individual factors that could change how your region experiences a downturn is, in fact, the only useful way to prepare for one.
Dr. Lisa Sturtevant is the chief economist for Bright MLS, having previously studied the housing market as a researcher at Virginia Tech University. She says that sometimes, looking at national price trends or sales becomes “meaningless” in the context of trying to understand real estate.
“The question is, where are you talking about?” she says.
Many observers, and even a few economists, have wondered if the current market could see a collapse on par in size and scope to the 2006 – 2008 housing bubble. Sturtevant, along with a majority of housing experts, says the current downturn is almost entirely unlike that crisis.
But what many forget, she says, is that not every market took an equal drubbing a decade ago, even as some homes lost half their value almost overnight. According to a 2018 Corelogic analysis, a few states only fell fractionally from their over-inflated peak back then. As several states saw average price declines of 40% or more, North Dakota, for instance, only saw home prices fall 2%, while a handful of other (mostly rural) states saw declines under 10%.
“There are places that we know in the past have been better during economic downturns, places that have what I call ‘recession-resistant economies,’” she says. “ will be better positioned if there is an economic downturn to support continued demand in the housing market.”
Dr. Shelton Weeks is a professor at the Lucas Institute of Real Estate at Florida Gulf Coast University. He affirms that just like the last major downturn, price drops, foreclosures and changes in consumer activity are all intrinsically tied to local conditions.
“When I think about any sort of swing in the market, the first thing I think of in terms of resiliency, and the markets that are going to be more resilient, are the ones that are experiencing steady population growth,” he says. “Nothing beats being in a growing market. It covers up a lot of flaws.”
Even this broad truth has to be delineated, however. Population growth that is based on one factor does not indicate the same resilience as growth based on another trend. It is up to each individual agent or broker to understand the granular details and history of their region.
In Seattle, Washington, York Baur is the CEO of MoxiWorks, a real estate-focused software company that serves 800 brokerages around the country. Baur urges real estate professionals to start researching these things now, if they haven’t already done so.
“Truly being an expert on behalf of your customer, both seller and buyer—I think that’s the goal of any good agent. And that means educating yourself proactively, not reactively to the issues,” he said.
Shaky or firm foundations
It would be nice if there was a universal scale, or a single metric, that could be used to evaluate how a given market will react in a downturn. If every market’s vulnerability to a recession was directly correlated with its COVID-boosted price appreciation, for example, knowing which area was about to get clobbered would be that easy.
Housing markets, however, are just too complex and interconnected for that kind of simplistic approach. Sturtevant, who recently conducted her own analysis of Atlantic Coast markets, attempting to discern the “riskiest” areas, says that she begins with five big factors: job markets, mortgage “sensitivity,” price appreciation, out-of-town buyers and inventory.
All of these factors taken together, Sturtevant asserts, allows for at least a rough idea of how a given housing market will behave in a downturn.
“Looking at the mix of jobs in the economy, how sensitive buyers are to mortgage rates, whether markets really saw a runup in prices fueled by out-of-town high-income buyers, and then what is inventory doing in terms of the supply side that could force prices in a downward direction,” she explains.
Within all of those, there is plenty more variation, however. Weeks points out that the job sector is sometimes more important than its superficial strength, at least when it comes to housing.
“When you think about folks that are in the tech sector, those types of skill sets will allow them to pivot much more easily than say, someone like myself, an academic. For folks like us, it’s hard to move,” he says. “That’s certainly a factor when you think about which communities might be able to adjust, or might see people move very quickly.”
Sturtevant agrees, while adding that predicting the specific behavior of different industries is a tricky proposition.
“Tech workers in Austin may be more willing to pick up and sell and do something else,” she says. “It may be that their job is gone because of an economic downturn, or it might just be it is time for the next phase, because did this ‘Austin COVID’ thing, and now need to go back to Silicon Valley.”
A tech-heavy economy like Austin could see faster falling prices for this reason compared to metros like Pittsburgh or Washington, D.C., where jobs are tied to research universities and the federal government, respectively, she says. Baur thinks tourism or travel-based job markets are vulnerable, noting that does not just mean areas that attract vacationers—markets with a lot of airline-supported jobs, for instance.
But delving even deeper, Baur adds that some industries that have traditionally been hit hard by recessions won’t necessarily sink in the current climate. He singles out manufacturing as a sector that has changed tremendously in the last few years in a way that will likely weather a recession—or at least help bolster certain regions against negative impacts.
“What we learned in the pandemic is the fragility of the global supply chain, and that’s causing a lot of stuff to get onshored—it hasn’t happened a lot yet, but there’s all sorts of reaction and planning on that basis,” he claims. “It’s very hard to predict because where these plans would be placed has a whole process on a company-specific basis, but there’s whole geographies that will actually benefit even in an economic slowdown.”
Another, even broader metric to look at is socioeconomic status. Weeks notes that generally, regions with lower-income residents will also be more affected, sensitive to increased mortgage rates, with buyers likely to get priced out of that market. Sturtevant adds the caveat that higher-income buyers (and homeowners) often have a larger exposure to the broader economic environment and could change their behavior—declining to upgrade a home, for instance. In this case, even higher-income regions could see decreased activity as families batten down the hatches against faltering.
“Higher-income households feel a different impact of rising rates,” she says. “I think the impact on higher-income folks has to do more broadly with investment returns, and then low income-folks, with the day-to-day.”
First-time buyers who were (or are) “stretching a little bit” in order to get into the market might be the hardest hit, according to Weeks—maybe forced to sell their home due to an overall economic downturn, but suddenly completely priced out of the area by interest rates and potentially with little equity if they bought near the top of the market. Markets with significant shares of these buyers are perhaps the ones to be most concerned about, he says.
“Buyers who were buying as much as they could…with this, I hate to call it false confidence, but the idea that prices are going to continue to go up,” he describes. “Those folks that were sort of the last ones in, if the market slows down…that’s where my concern would lie.”
What goes up…
Many observers have tried to use that simple approach of assuming that every region’s potential pullback is going to be based on how much, and how fast, prices and home values went up. Sturtevant says that while this approach is not incorrect, it is also far from the full picture.
“Some of the outlying markets that really surged in the pandemic, is allowing those existing residents that were frankly priced out by an influx of out-of-town buyers—it allows them maybe a chance to regroup and maybe get back in the market,” she says.
Demand from existing residents, along with the right kind and amount of inventory, could essentially set a floor for the pullback—not preventing the pain, but getting a tourniquet on it.
That extreme demand imbalance, with plenty of regions still having hordes of buyers eager to pick up a house even with much higher mortgage rates, is likely to be a significant cushion even in places where prices have ballooned, according to Weeks.
Case in point—Weeks’ own backyard in Florida, which has seen some of the most spectacular and consistent price growth over the last year or two.
“We had, last month, almost a 30% jump in the number of properties listed by REALTORS® ,” he says. “But we’re so far below what you would consider a healthy level of inventory…that we’ve got a ways to go before we get to a level of inventory for just normal market function.”
Properties are now sitting for around a week instead of getting multiple offers and disappearing in the first day, he says, which is still “ludicrous” and also a testament to the resilient and reliable demand for homes there.
Inventory is a very tricky metric to interpret in a pullback. Broadly, scarce inventory could prop up prices, but a downturn could also depress new construction and leave a market starved and stagnant, according to Sturtevant.
“Now what builders are finding is they can’t build speculatively—or they can, but it’s getting harder and harder to price that home,” she explains. “I think—I’ve heard anecdotally—that there’s pullback from builders because they’re waiting for things to settle out a bit, and they can get better on pricing.”
Regions that have the potential to free up enough existing homes have a better chance of weathering the pullback, because that wait-and-see approach from builders is not going away, according to Sturtevant, with no real broad overbuilding like what happened in 2008.
“I don’t see a turnaround on the new construction anytime soon to help alleviate the inventory problem,” she says.
Weeks says that loose monetary policy has most benefited specific kinds of housing stock—high-end and luxury homes, first of all. Regions with these types of homes and buyers are also generally going to be able to “ride out the storm.” He adds that demand for condo and multi-family spaces “is going to stand up better” generally, in a downturn, as rising interest rates squeeze the higher-priced single-family market.
Agents, if they want to stay ahead of the trends, need to start checking in with their local planning department, Baur suggests, and should be “brushing up” on the latest trends—ADUs, for instance, which are receiving more attention and support particularly in some markets.
“Some people are thinking of this multi-family transition as being a very long-term thing, and it is, but there are very short-term moves that can start to happen once the zoning changes,” he says.
No matter the degree or the factors, though, a downturn is inherently scary. Despite the broad consensus among experts and widespread evidence that there is no mortgage crisis, no high-risk lending that could fuel a crash as ugly as 2008, many still remember that a good deal of experts denied the existence of a bubble back then—right up until it burst. The National Association of REALTORS® (NAR) distributed “anti-bubble reports” in late 2005 that explicitly claimed that “the facts simply do not support the possibility of a housing bust.”
Because of the many reforms and regulations implemented since 2008, and because price appreciation has stemmed from a very obvious supply-demand imbalance rather than more nebulous factors, it is hard to imagine a pullback looking like that crash, even if it is more painful than most observers expect.
Sturtevant says that the “resetting” that is happening right now is actually going to be a positive development for the market.
“It is a good thing. I think it is good for homebuyers to have more options, to have more time to make their choices,” she explains.
From a purely real estate perspective, Baur claims that previous downturns have shown that there is an “inherent flight to quality” as far as where consumers are taking their business, and speculative or budget brokerage models could also suffer more going forward, depending on what a downturn looks like. Some agents and brokers may not be able to stay solvent in the new environment and potentially drop out, or at least rethink how they do business.
But even that is a good thing for the industry, Baur claims.
“It’s unfortunate, but I think it will favor the quality end of the market, and I think that’s ultimately good for the industry and certainly the consumer, because it tends to favor those who are experienced and provide a high level of service,” he says.
Editor’s Note: An earlier version if this article misstated the number of brokerages served by MoxiWorks.