While an economic downturn would have a negative impact on the region, its effects would likely be much worse in the U.S. metropolitan areas that saw an influx of people from places like the Bay Area, a new report says.
The report, from home listings site Redfin, looked at 98 U.S. metro areas to identify whether their housing markets were likely to be vulnerable or resilient in a potential recession.
It calculated an overall risk score based on 10 indicators including average debt-to-income ratio, percent of homes flipped, home price volatility, average home loan-to-value ratio, and year-over-year change in domestic migration. The higher the overall risk score, the higher the risk of a housing market downturn.
In that equation, Bay Area homeowners have a lot working in their favor, said Daryl Fairweather, chief economist at Redfin.
“Recession risk is more to do with the financial stability of the homeowner,” Fairweather said. “Mortgage rates are really like taking your foot off the brake, while a recession is putting your foot on the brake.”
Migration hot spots where home prices soared, such as Riverside, Boise, Las Vegas, Sacramento, Phoenix and Tampa, all landed in the top 10 with the highest overall risk scores. Rust Belt and Northeast cities including Akron, Philadelphia, Cleveland, Boston and Buffalo, are among the most resilient and less likely to see a decline in home values, according to the report.
Three Bay Area metros landed in the middle of the list, meaning they are not among the most at-risk places. San Jose had a risk score of 46.4, San Francisco’s was 46.3, and Oakland was at 45.8.
“What’s different about the Bay Area is it never really heated up too much during the pandemic,” Fairweather said — though she added that some parts of the region were hotter than others, including suburban and North County locales.
San Francisco had a significant exodus during the pandemic in 2021 — behind only Los Angeles and New York in year-over-year net migration — because of its high prices and large number of remote workers, Fairweather said.
That “led to a very cool housing market,” she said.
As a result, she said, San Francisco “doesn’t really have anywhere to fall” — unlike superheated pandemic markets including Riverside and Austin.
San Jose and Oakland also had high rates of people leaving last year.
All three Bay Area metros were among the lowest in average home loan-to-value ratios — average home loan divided by home value for homes purchased in 2021. The values were 72% in San Francisco (the lowest out of all metros), 74% in San Jose (the second lowest), and 78% in Oakland (the fifth lowest).
That means that if home prices decline, homeowners would not be underwater if they needed access to cash, Fairweather explained.
The “share of second homes” metric, which measures how many homes sold in 2021 in a metro were second homes, was very low for all three Bay Area metros: 0.8% in San Jose, 1% in Oakland and 2.4% in San Francisco.
Many areas with higher percentages saw an influx of buyers who were able to work remotely and sought vacation homes as a pandemic escape, which reduced inventory and drove up prices. But with many people returning to the office, the trend has cooled, and a considerable share of those homes could go back on the market — adding to a region’s risk in a recession.
The percentages of homes flipped, which is based on how many homes were bought and resold in a given metro area within six months in 2021, is a measure of speculative activity in each metro area — according to Redfin, a higher number indicates less market stability. The percentages were relatively low in all three Bay Area metros: 2.6% in Oakland, 2.5% in San Jose and 1.9% in San Francisco.
Still, Fairweather said the pandemic heyday for substantial increases in Bay Area home values is over.
“Moving forward, San Francisco will probably see a pretty modest price appreciation,” she said. “It’s gotten so expensive that there is not much more room to grow.”
But while she said home values are unlikely to keep rising at the pace of the last two years, they should hold because the Bay Area is still a desirable place to live.
By contrast, Riverside had the highest overall risk score of 84%. The Southern California city had the highest year-over-year net migration in 2021 of more than 19,000 residents, a high year-over-year price growth in 2021 of 21%, and a relatively high percentage of second homes sold in 2021 of 7.7%.
Sacramento, which was a popular destination for Bay Area residents to move during the pandemic, ranked sixth on the list with an overall risk score of 73.1. There, the home loan-to-value ratio is 81%, 5.4% of homes were flipped last year, year-over-year price growth was 19.3% and year-over-year net migration was more than 4,100 in 2021.
Fairweather said overheating in those housing markets is what makes them risky. Riverside and Sacramento are in the same boat, she said — people fled there for more affordability, which pushed up home prices.
“People who are buying homes in Sacramento can stretch their budgets a little more, and therefore borrow more,” she said. Also, “More homes were flipped because investors recognize it’s a boom town right now.”
“It went so high up, and now it’s coming back down to earth,” she said.
If a buyer is looking at Sacramento, they should consider what would happen if prices decline, especially if they need to sell in a year, Fairweather said. As a long-term investment, the purchase might be a better deal, she said.
As for other major metros that have lower overall risk scores compared to the Bay Area, like Boston with a risk score of 32.6 and New York at 35.4, Fairweather said both cities took an especially hard hit during the pandemic, but now they are bouncing back and their “recovery is much stronger than San Francisco.”
Kellie Hwang is a San Francisco Chronicle staff writer. Email: firstname.lastname@example.org Twitter: @KellieHwang