Housing markets most at risk of downturn

States vulnerable to foreclosures, affordability and plunging home sales named.

New Jersey, Illinois and California are among the most vulnerable housing markets in the US due to worsening affordability, slowing home sales and a rise in lender foreclosures on delinquent mortgages, according to a new report by real estate data provider, ATTOM.

The Special Housing Risk Report spotlighting county-level housing markets revealed that the three states had the highest concentrations of the most-at-risk markets in the second quarter, with 33 of the 50 counties most vulnerable to potential declines.

The conclusions were drawn from an analysis of the most recent home affordability, equity and foreclosure reports. ATTOM based its criteria on the percentage of homes facing possible foreclosure, average local wages required to pay for major homeownership expenses on median-priced single-family homes, as well as the portion with mortgage balances exceeding estimated property values and June unemployment rates taken at a local level.

The report concluded that the Chicago and New York City areas were most exposed to potential downturns in the second quarter.

The 50 most at-risk markets included nine in and around New York City, six in the Chicago metropolitan area, and 13 spread through northern, central and southern California.

The biggest clusters were concentrated in the New York City and Chicago areas. The rest of the top 50 counties were scattered across the nation, including three in the Philadelphia metro area.

By contrast, southern and midwestern states were less exposed to a potential downturn in the housing market.

Broken down, ‘major homeownership costs’, namely mortgage payments, property taxes and insurance, ate up more than one-third of average local wages in 35 of the most vulnerable 50 counties.

Moreover, at least 7% of residential mortgages were underwater in the second quarter in 23 of the most at-risk counties. Nationwide, 5.9% of mortgages fell into that category.

In addition, more than one in 1,000 residential properties faced foreclosure action during the same period in 40 out of the 50 most at-risk counties, and one in 1,559 homes across the nation.

The report added: “Amid that mixed scenario, home affordability is worsening, lender foreclosures on delinquent mortgages are up and the number of home sales is slowing, with local housing markets heading into that uncertain future facing significant differences in risk measures.”

Rick Sharga (pictured), executive vice president of market intelligence at ATTOM, warned that the Fed’s efforts to tame inflation had failed so far but could in turn spark a recession.

“The Federal Reserve has promised to be as aggressive as it needs to be in order to get inflation under control,” he said. “Given how little progress has been made reducing inflation so far, the Fed’s actions seem more and more likely to drive the economy into a recession, and some housing markets are going to be more vulnerable than others if that happens.”

The report also highlighted that foreclosure actions had gone up since the expiry of the federal moratorium last July.
The moratorium was put in place to prevent lenders taking back properties from homeowners who fell behind on their mortgages during the start of the COVID pandemic.

More recent foreclose data from ATTOM shows that foreclosure filings — default notices, scheduled auctions or bank repossessions — went up 14% in August compared to July, and by 118% from a year ago.

Illinois, Delaware and South Carolina had the highest foreclosure rates, while completed foreclosures increased 28% compared to the previous month, returning almost to pre-pandemic levels.

Although foreclosure rates are expected to continue rising, ATTOM pointed out that more than 90% of borrowers in foreclosure “have positive equity in their homes”.

The report nonetheless highlighted the “ongoing wide disparities in risks throughout the country” at a time when mortgage demand is at a two-decade low, sales of existing and new homes have slumped, rising mortgage interest rates have almost doubled to 6% in a year, and inflation is close to a 40-year high, all of which is conspiring to “slow down or end an 11-year surge in home prices”.
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Despite this, the report said there was no suggestion of “an imminent fall in housing markets anywhere in the nation”, as home prices have risen more than 10% in most of the US over the past year, which has “kept homeowner equity and home-seller profits rising”.