A housing crash would sink these 16 housing markets—while these 23 markets would be spared

July 15, 2022, 8:50 AM UTC

The U.S. housing market is clearly caught between a rock (the Fed) and a hard place (runaway inflation). Over the past two years, the pandemic housing boom has driven up prices for everything from rents to lumber to windows. In the eyes of the Fed—which has used monetary tightening to apply upward pressure on mortgage rates—that inflationary engine must be stopped. The central bank’s attack plan seems to be working: Spiking mortgage rates have already pushed the housing market into a “housing correction.” Across the nation, home sales are plummeting and inventory levels are soaring.

While most housing economists insist this cooling won’t lead us into another 2008-type housing crash, the housing correction does increase the possibility that some markets could see steep home-price declines. To find the housing markets at the highest risk of a housing crash, Fortune once again teamed up with Home.LLC, a startup that provides down-payment assistance to homebuyers in return for a share of any profits.

To calculate the risk assessment, data scientists at Home.LLC helped us build a forecast model using 14 metrics. Those metrics include building permits, land use restrictions, delinquency rates, housing inventory, and average home tenure. (To see a full list of weights used in our risk assessment, go here.) Finally, we grouped regional housing markets into three tiers: low risk, moderate risk, and high risk. The housing markets labeled “high risk” would, by our estimation, fare the worst if a housing correction or crash materializes over the next few years. In total, we looked at the 100 largest metropolitan statistical areas in the nation.

Among the nation’s 100 largest housing markets, 23 markets fell into the low risk category. Meanwhile, 61 housing markets got the “moderate risk” label and 16 markets were labeled “high risk.” That’s a sizable shift since last month. Back in June, we labeled 37 markets as “low risk,” 52 markets were labeled “moderate risk,” and 11 markets were put in the “high risk” camp.

It's striking how many "high risk" housing markets are located in the Sunshine State. Indeed, 8 of the 16 "high risk" housing markets call Florida home. Those "high risk" Florida markets include Cape Coral, Deltona, Jacksonville, Lakeland, Miami, North Port, Palm Bay, and Orlando.

"Most Florida markets face significant risk of oversupply of inventory," Nik Shah, CEO of Home.LLC, tells Fortune.

As the pandemic housing boom took hold, homebuilders across zoning-friendly Florida ramped up production. However, elevated homebuilding levels now leaves the Sunshine State at a higher risk of "oversupply," Shah says. If home sales continue to plummet, it could turn into a supply glut. That oversupply scenario, of course, is how markets like Miami, Las Vegas, and Phoenix got hammered so hard back in 2008.

It isn't just Florida. Several bubbly housing markets across the Southeast, Mountain West, and Southwest could also see busts in 2023. That includes places like Phoenix and Boise where the pandemic housing boom was particularly boosted by Seattle and San Francisco techies who moved into town. There's less of that now. Recession fears coupled with spiking mortgage rates have put cold water on those WFH moves. If markets like Phoenix and Boise are to stave off steep home price declines—something both Moody's Analytics and John Burns Real Estate Consulting are predicting—local households will be required to pony up sums that could be beyond their financial means.

There's another threat in these "high risk" markets: investors. Over the past two years, markets like Atlanta, Jacksonville, and Phoenix were bombarded with interest from investors—everyone from mom-and-pops to institutional buyers. On the way up, it helps. But as things slow, those investors could put downward pressure on home prices.

"Live-in owners don’t sell just because they think it’s the top of the market or because prices are fading. But investors will [try to sell], and we have a lot more investor-owned houses now than we used to," says John Wake, an independent real estate analyst based in Phoenix. "Investors were already big, but they really jumped into the Phoenix market big-time in 2021. But investors sometimes move in a herd. If Phoenix real estate isn’t the cool investment anymore in 2022, it could have a big and quick impact on home sales. If a lot of investors decide to sell…yikes."

Heading into 2022, the average 30-year fixed mortgage rate stood at 3.1%. By April, that rate had climbed above 5%—a level that pushed the U.S. housing market into cool-down mode. Then in May, that cooling accelerated into a full-blown housing correction.

So far, "high risk" housing markets are among the places seeing the sharpest corrections. Between January and June, U.S. inventory climbed 51%. In places like Austin and Boise, inventory jumped 122% and 161%, respectively.

"I don’t think the market will face a Great Financial Crisis–like bust given the different dynamics today around mortgage lending standards and strong builder balance sheets," Ali Wolf, chief economist at Zonda, tells Fortune. "We can’t ignore, however, that the market is already correcting. Higher home prices and higher mortgage rates rose to the point that demand seized up in many parts of the country. Home prices are already adjusting down, and we could see that continue until consumer confidence and affordability reset."

A growing chorus of economists believe bubbly housing markets, like Phoenix and Austin, have already entered into a home price correction. Look no further than Moody's Analytics, which forecasts that significantly "overvalued" markets will soon see home prices decline by 5% to 10%. If a recession hits, the firm predicts, those markets could see home prices fall by 15% to 20%.

"It’s too late to sell at the top," Wake says.

Want to stay updated on the housing correction? Follow me on Twitter at @NewsLambert.

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