Every real estate investor wants to know if there’ll be a housing market downturn in 2024. But perhaps a better question to ask, now and always, is: “Which local markets are most at risk of a downturn?”
Regional variations consistently play a part in any housing market analysis or forecast. And now we have the most up-to-date Special Housing Risk Report from real estate data provider ATTOM.
ATTOM’s data set is valuable to anyone wanting to zoom in on the prospects of investing in a specific area. The data is organized by county, which allows for precise localized predictions about housing market health going into the new year.
ATTOM uses four main parameters for gauging the risks of a housing market downturn in each area. Here’s a look at each.
1. Home Affordability
This factor is assessed by looking at how much homeowners spend on housing costs, including their mortgage, home insurance, and property taxes. In order to count as affordable, a home should cost its owner no more than one-third of their salary. On its own, however, this measurement does not indicate whether an area is at risk or not.
Speaking to BiggerPockets via email, ATTOM CEO Rob Barber explained that affordability remains an ‘‘area of similarity’’ between most and least at-risk housing markets: ‘‘In 37 of the 50 most-exposed and 36 of the 50 least-exposed markets, major homeownership expenses required a larger portion of average local wages than the national level.’’
Affordability is at low levels nationwide, with the average percentage of local wages required to cover housing expenses now standing at 34.6%, according to Barber.
2. Percentage of Underwater Mortgages
An underwater mortgage is a mortgage loan that is more than the current market value of the home. A high percentage of homes that currently are worth less than the remaining mortgages on them is a sign that trouble may be afoot.
Barber told us that ‘‘among the top 50 markets most at risk, 28 had larger portions of residential mortgages that were underwater than the national figure of 5.3%. Just two of the 50 least at-risk markets faced that situation.’’
3. Number of Homes Facing Possible Foreclosure
ATTOM accessed its own foreclosure reports in order to analyze the vulnerability to foreclosure activity in each county. Foreclosures happen everywhere, but there is a national benchmark for a level that is alarming and could indicate that an area is headed for major housing trouble.
Of course, everyone remembers the mass foreclosure disaster that hit the housing market back in 2008, when large numbers of American homeowners found themselves unable to pay for their homes almost overnight. While this situation is extremely unlikely to ever be repeated thanks to tighter affordability checks for mortgage applicants, some local markets are still at risk of higher-than-average foreclosure numbers because they do not have adequate foreclosure prevention measures in place, and have large numbers of people on low wages or at risk of unemployment.
The difference between the most and the least at-risk areas is pretty stark. As Barber points out: ‘‘All but one of the top 50 counties had higher portions of homeowners facing possible foreclosure than the national rate of one in every 1,389 residential properties. None of the counties in the list of those least at-risk surpassed the nationwide benchmark.’’
4. Unemployment Levels
The relationship between this factor and the previous one is very clear: The higher the local unemployment level, the higher the chance of an eventual housing market downturn through a wave of foreclosures and subsequent lowering of home values.
While it can seem like a housing market is still thriving—i.e., home prices are high—steadily growing unemployment is bad news in the longer term. ‘‘Unemployment rates in November of last year were higher than the 3.9% nationwide figure in 49 of the most at-risk markets, but in none of the least exposed,’’ says Barber.
How much of a risk of a housing market downturn does the most exposed area face? According to Barber, the figure is anywhere between two to six times the risk of the least exposed areas.
With these figures in mind, here are the most—and least—vulnerable housing markets in the U.S. right now.
The Most At-Risk Markets
According to ATTOM, the areas with the highest risk of housing market downturns are clustered disproportionately in Chicago, New York City, and in California. These three regional markets took a whopping 21 of the 50 at-risk locations in the ATTOM report.
New York fared especially poorly, with both central areas like Brooklyn and the Bronx and suburban areas encompassing New Jersey showing signs of potential trouble. In California, several areas around Fresno showed similar downward trends. In Chicago, seven areas were identified as being at a high risk of a housing market downturn.
However, New Jersey is the one to watch for a possible wave of foreclosures in the near future. ATTOM’s data shows that several New Jersey counties had the highest foreclosure rates in the country. They are:
- Cumberland County (Vineland), New Jersey (one in 359 residential properties facing possible foreclosure)
- Warren County, New Jersey (outside Allentown, Pennsylvania) (one in 459)
- Sussex County, New Jersey (outside New York City) (one in 461)
- Gloucester County, New Jersey (outside Philadelphia) (one in 470)
- Camden County, New Jersey (one in 509)
Unemployment figures are currently the most alarming in two Californian countries: Merced County (outside Fresno), which has a very high unemployment level of 8.9%, and Kern County (Bakersfield), where unemployment is at 8%. New Jersey’s Cumberland County also has a high unemployment level of 7.3%, and New York City’s Bronx County is not far behind at 7.2%.
As the data suggests, underwater mortgages on their own are not the strongest indicator of a possible housing market downturn, as only 28 of the 50 most at-risk counties have that problem. However, a high percentage of underwater mortgages does signal that something isn’t right in the area and is something any potential investor should investigate.
Take Webb County, Laredo, Texas, the U.S. area with the worst underwater mortgage rate of 56.6%. Earlier this year, Laredo dropped out of the list of top 10 safest U.S. cities, according to WalletHub. Its home and community safety rankings are going down, as is the financial well-being of its residents. It really isn’t surprising that so many people there are now finding that they own homes that are worth less than their mortgages.
The Least At-Risk Markets
In contrast to these high-risk markets, many areas in the U.S. are enjoying low foreclosure and unemployment levels, as well as low rates of underwater mortgages, with most homeowners enjoying high levels of equity in their homes.
The South, Midwest, and New England fared especially well in the third quarter of 2023. This won’t surprise savvy real estate investors who already know that these areas of the country have buoyant housing markets boosted by healthy local job markets and/or reasonable living costs.
Take Nashville, Tennessee. Three Nashville metropolitan areas (Davidson, Rutherford, and Williamson) feature on the least at-risk ATTOM list. This is despite the fact that Nashville is not known for affordable housing, with the average home price in the city now approaching $600,000.
So how can Nashville have such a stable housing market? The answer is simple: a low unemployment rate (2.9%) and a cost of living that is 2% lower than the national average. At the same time, the average salary in Nashville is $66,962, which is higher than the national average of $59,428. This is why there is very little chance of a housing market downturn here: People will continue buying expensive properties in Nashville because they can get good jobs and their other expenses won’t be as high as in, say, New York City.
Other cities with similarly upbeat housing market trajectories include:
- Knoxville, Tennessee
- Washington, D.C.
- Hennepin County, Minneapolis
- Salt Lake City
- Wake County, Raleigh, North Carolina
A special mention should go to Burlington. This Vermont city is prosperous in every way imaginable. According to the report, it has the lowest foreclosure rates in the country (1 in 72,326), the lowest underwater mortgage rate of just 1%, and a very low unemployment rate of 1.8%. All this reflects almost no chance of housing market trouble here.
Those interested in the Midwest should look into Wisconsin. Several counties in the state have similar economic conditions to New England, especially Dane County (Madison) and Eau Claire County.
The Bottom Line
There is a very valuable decision-making blueprint for investors in the ATTOM report. It pays to do thorough research into multiple economic parameters in any particular area.
Ask the right questions, such as: Are most people here in secure, well-paying employment? Do they have healthy levels of equity in their homes? And can they afford to live here, apart from the housing costs?
When these conditions are met, an area will likely enjoy housing market stability for the foreseeable future.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.