Since the Great Recession in 2008, Americans have been understandably concerned about another one devastating their finances. Since the housing market and the economy have recovered, buyers have entered the housing market in full force. As a result, housing demand is higher than ever while inventory remains low across the country. For buyers to make the most financially sound home purchase, determining where to make a purchase is as important as what home to purchase in order to avoid losing wealth in an inevitable recession. Recently, Redfin assessed which markets would perform the best in an economic downturn and Austin showed strong results.
Home Prices and a Recession
To put things into perspective, the Redfin report outlined the recessions that occurred in the U.S. since 1980 to get a good understanding of what caused them. According to the Redfin research, inflation-adjusted home prices only declined an average of 2.7 percent from the month before the recession began to the final month of the recession in all but the 2007-2009 Great Recession. Redfin analysts collected their data from the home price index data from Robert Shiller.
What differentiates the Great Recession from other recessions in terms of reduction in home prices is that the overinflated housing market was its major cause of the 2008 downturn. But the housing market, which remains strong, is unlikely to play a major role in the next recession. For that reason, housing prices will likely not be as negatively affected as they were in 2008.
“Home prices are high right now, but they’re high because there’s not enough supply to meet demand, which means there’s not a bubble at risk of bursting,” said Redfin chief economist Daryl Fairweather. “Most of today’s financed homeowners have excellent credit and a cushion of home equity, making them unlikely to default on their mortgage even if their weekly grocery bill grows or their stock portfolio shrinks in the next recession.”
Whatever does end up causing the next recession, housing markets in certain metro areas are at greater risk of negative impacts like declining prices and a glut of homes for sale.
To come up with the ranking, Redfin analyzed seven factors among 50 cities, including Austin. The Redfin researchers then came up with an overall risk score for each metro area. For each factor, the higher the score, the higher the risk. Redfin developed their scores based on the following factors:
- Median home sale price-to-household income ratio (weight: 1.5, higher is riskier)
- The average loan-to-value ratio of homes sold in 2018 (weight: 1.5, higher is riskier)
- Home price volatility, measured by the standard deviation of home prices year-to-year (weight: 1.5, higher is riskier)
- Share of home sales that are flipped, i.e. sold twice within 12 months for a different price (weight: 1.5, higher is riskier since flipping can be volatile in a shaky economy)
- Diversity of local employment, measured as the probability that any two randomly selected workers are in the same field (weight: 1.0, higher probability is riskier)
- Share of the local economy dependent on exports (weight: 1.0, higher is riskier during a trade war)
- Share of local households headed by someone age 65 or older (weight: 0.5, higher is riskier)
For each metro area, Redfin developed an overall risk score based on the averages calculated in the above-named categories.
Austin Area Housing Market
Austin, TX came in at number 25. Having a balanced risk ratio shows that Austin’s real estate values have a good chance of maintaining their worth in a recession. The Austin job market and economy performed relatively well in the last recession and home prices were affected but nominally. For those reasons, the Texas Capital was able to rebound fairly quickly – and powerfully – during the recovery.
As a result, the Austin housing market has strengthened to a point where homeowners have a financial safety net in their home equity that will help insulate them in the next economic downturn. Since Austin area real estate growth is expected to remain strong for the foreseeable future, home values will continue to strengthen and housing demand will likely remain strong. For would-be homebuyers, the recent Redfin ranking and Austin real estate market performance means that buying into the Austin area real estate market will likely provide stable home equity growth for years to come.
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