Recession-Proof Metros: Redfin Report

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Redfin recently did a report on cities least and most likely to be affected by a recession. Least volatile were Rochester NY, Buffalo NY, Hartford CT. Most volatile were Riverside CA, Phoenix, AZ, Miami FL. The criteria they used was: Price/income, LTV, St Dev, Flipping, employment diversity, exports, demographics. Interestingly, there aren't huge differences in criteria across the board except for price/income where differences are stark. I was struck by Redfin's comment that San Fransisco is not considered at risk yet has a very high unaffordability ratio (price to income). I'd be interested to hear what others think about the criteria used. For example, are local mortgage underwriting regulations, property taxes, geo-climate risks, and foreign investors factors that are also important.

Redfin plays down the risk of homes being affected by a recession stating high valuations are the result of lack of inventory. While that is true the demand side of the equation has been incentivized by a post-crash prolonged period of cheap credit. They go on to claim that mortgage regulations have ensured stronger collateral in the form of higher levels of equity thus reducing the likelihood of defaults. Yet LTVs have been (are) in some instances 90%, a direct result of very high values. 

My view is I don’t think much has changed this time. Home prices are back to where they were in some areas, so if it was a bubble then, it is must be a bubble now. What has changed is securitization or collateralization meaning subprime is less apparent, which is what brought down the house of cards and led to the credit crisis. However, that still leaves valuations in the stratosphere and begs the question whether the tail will once again wag the dog. So will valuations be the catalyst rather than the victim? Impossible to know, but Redfin clearly predicts localized volatility and appears to be offering a hedge or flight to safety, which investors may find useful. Though clearly everything needs to be viewed in a broader context; trade wars, global growth, financial markets etc. For those who take hedging to another level Prof Robert Shiller suggests buying a put option on home price futures. Can’t see that catching on somehow.

I don't know why everyone panics over the fact that home prices have risen in a healthy economy. House prices raise over time, and in a lot of areas, when adjusted for inflation, prices are actually lower or just near where they were 12 years ago. Home prices weren't going to to just stay at 2009 levels forever. No need to ring the panic alarm and say housing is on the verge of collapse because of this metric. 

New car prices are well past where they were a decade ago yet no one predicts the collapse of the auto industry.

All in all, invest wisely and watch for local market activity trends.The word "recession" is not strictly synonymous with housing and in most recessions historically, home prices either flatten slightly or continue to rise. Take a look for yourself

Make smart decisions based on facts and not fear, and you should be fine in the long run.

Rochester, NY is a terrible market to invest in property. I would encourage all real estate investors to look elsewhere to place your dollars, because Rochester is certainly not the place for you if you are looking for a great ROI!

Hi @David Stott ,

I’m curious why you would say that about Rochester, NY? It seems to me that Rochester is a place with very low appreciation but very high cash flow. Personally, I'm ok with that. Am I missing something. Can you tell me why it’s a terrible market to invest in? I was actually starting to look into the market. Thanks!

Lack of liquidity will likely be the trigger for the next crash. Very few buyers pay cash, and when liquidity dries up, buyers will be unable to get financing resulting in a decrease in demand. Interest rates are heading lower. In Europe, interest rates are already negative, which is costing the banks billions in lost profits. It begs the question, if the economy is so great, why the push for lower interest rates? That makes no sense. The problem is sovereign debt. In the USA, the national debt is $22 Trillion and growing by $1 Trillion per year. If interest rates were to return to historical norms, 50% of tax revenue would go just to service the debt leaving nothing left for discretionary spending. 

I have lived through 2 crashes so far. When property values are increasing at a much faster rate than incomes, the increase in property values becomes self-limiting as the point is quickly reached where the majority can no longer afford it. That point is usually a prelude to a crash or a very significant correction. 

Dennis, I agree with what you say but also was hoping for a discussion on Redfin's criteria and rankings. So far, Rochester seems to bear it out. So you go long Rochester and short Riverside? Does risk adjusted return optimization work within RE? If you bought into both markets, quite possibly. If you added CRE and international to the mix you further diversify etc. Or, do you just buy funds/REITs? Direct investing has both advantages and disadvantages. Were the advantages to outweigh their counterpart, would that create too much irrational exuberance? Etc...

I think it is a function of the severity of the correction. In 2008, no area (with the exception of Texas), was immune from the crash. Texas real estate never appreciated that much prior to the crash because of the low oil price environment during that period. If you were to extrapolate that to current conditions, it suggests that the safest markets are those that have seen little or no price appreciation in the past 7 years. Then the objective would be to find properties with good cash flow with no expectation of capital appreciation.

I think @David Stott is trying to down play ROCHESTER so he can have all the great deals out there lol. Although I invest in several markets throughout US, rochester is the best cash flowing of all. When

It comes to property appreciation, this is NOT the place. Think Arizona. Florida, or TX.

@Dennis Cosgrove A lot boils down to the severity of the credit crisis. Texas did indeed flat line through the bubbly years. However, it has since seen a large appreciation in values. I think higher property taxes play a role in holding back irrational exuberance, but in the case of Texas, I wouldn’t be surprised if investor activity has had something to do with pushing up prices. If you take that scenario it could play out in places like Rochester. However, I believe real estate is playing proxy to financial markets. If we get a sizable correction in stocks and bonds, it may suck some of the oxygen out of RE. The switch will come when (if) the risk free rate competes with cap rates themselves already under pressure from rents not appreciating as much as values.