Where the Coronavirus Recession Will Likely Hit Hardest in the U.S.

The real estate market is, like the rest of the economy, in turmoil due to the coronavirus and subsequent lockdowns. Some, such as Bryce Robertson here at BiggerPockets, believe the coming crash will be worse than the 2008 Great Recession. Others’ outlook is not so bleak (including myself), but virtually no one is predicting the “V-shaped recovery” many hoped for at the outset of the crisis.

So how will real estate be affected?

Well, the question of how may not be easy to answer, other than a vague notion that it won’t be good. But the question of where it will be affected the most might be elucidated by looking at what happened during the real estate crash of 2008. While it is universally agreed that housing was what caused that crash, the housing market did not collapse evenly.

In certain areas, it was hurt. And in other areas, it was outright devastated.

Where the 2008 Housing Crisis Hit Hardest

During the Great Recession, the number of foreclosure filings nationwide skyrocketed from 532,833 in 2005 to 2,871,891 in 2010! It was truly a catastrophic housing collapse.

As the following chart from Wikipedia shows, the housing crisis in 2007-2008 was extremely deep, with prices falling almost 34 percent from peak to trough:

As noted above, however, this fall was not evenly distributed. As just a cursory look at the appreciation rates that preceded the crisis (1998-2006) shows, the Northeast, Southwest, and Florida saw, by far, the most appreciation before the collapse:

Map of USA with inflation-adjusted home-price appreciation from 1998-2006 — *AltiusBimm at en.wikipedia – Based on Image:Map of USA with state names.svg*

The counties that had massive amounts of appreciation also tended to be the ones hit hardest during the 2008 recession, as can be seen by this map from RealtyTrac for the foreclosure rate by county in 2008. You will immediately notice that the hot spots are remarkably similar (although the Northeast was hit substantially less hard than the Southwest and Florida).

‘The Foreclosure Five’

In 2009, the economist Alan Reynolds pointed out that “The Foreclosure Five”—California, Nevada, Arizona, Florida, and Michigan—had by far the most foreclosures. As he noted:

“One out of 76 homes in Nevada went into foreclosure in January, for example, compared with one out of 173 in California, with Arizona and Florida close behind. In New York, by contrast, only one out of 2,271 homes went into foreclosure.

“Nationwide, foreclosures fell 10% in January, to one out of every 466 homes. But that is a ‘mean’ average dominated by places like California and Florida. In the median state with the 25th highest foreclosure rate, by contrast, only one out of 949 homes was in foreclosure—just one-tenth of 1%. Foreclosure rates were even lower in 25 other states. In Vermont, foreclosures amounted to just one out of 51,906 homes. Foreclosure can be a personal crisis, but it is not a national crisis.”

By 2011, a similar trend could still be found. From RealtyTrac, we find that “Nevada, Arizona, and California post top state foreclosure rates for the year. More than 6% of Nevada housing units (one in 16) had at least one foreclosure filing in 2011, giving it the nation’s highest state foreclosure rate for the fifth consecutive year despite a 31% decrease in foreclosure activity from 2010.”

Those who lived through this economic disaster can remember the sweeping tracts of brand new and completely empty suburban housing developments that were reminiscent of Chinese ghost cities, a zombie apocalypse film, or a neutron bomb having just gone off.

These developments tended to be in the Southwest and Florida, the epicenter of the economic disaster. Here, for example, is one new and completely vacant subdivision of mansions in Henderson, Nevada (a suburb of Las Vegas). Shockingly, not a lot of people are taking trips to The Strip to gamble ’til their heart’s content in the middle of a deep recession.

In the last quarter of 2007, NAR found that housing prices had fallen 5.8% across the country year over year (and would keep falling for several years thereafter). Of course, this trend was not even close to evenly distributed. The “Foreclosure Five” had 10 of the 15 hardest-hit metro areas. The top three were:

Riverside/San Bernardino/Ontario, Calif.: -16.8%
Sacramento/Arden/Arcade/Roseville, Calif.: -18.5%
Lansing/E. Lansing, Mich.: -18.8%

States That Fared Better

On the other hand, those that tended to do the best were in “flyover country” and smaller cities and towns outside of the Southwest and Florida. New England also survived the crash quite well.

According to the Bureau of Labor Statistics, the unemployment data tended to mirror foreclosures, with “The Foreclosure Five” all having unemployment rates over 10% by 2010. The United States unemployment rate was 9.6%, but the “Foreclosure Five” had rates of:

Florida: 10.2%
Arizona: 10.7%
California: 12.4%
Michigan: 12.5%
Nevada: 14.9%

Overall, the West and Pacific had the highest unemployment rates while the South, Midwest, and Northeast hovered around 9%.

Some states survived remarkably well, though. Iowa and New Hampshire, for example, had an unemployment rate of only 6.1%. Vermont and Virginia came in at 6.2 and 6.9%, respectively. North Dakota had an almost unfathomably low rate of 3.9%!

New England, the Northwest, and many “flyover states”, as well as smaller towns, did substantially better than big cities. And the 45 states not in the “Foreclosure Five” survived the crash much better than those unfortunate five.

2008 Recoveries

While the crash centered on Florida, Michigan, and the Southwest, the recoveries did not. Indeed, according to an analysis by 24/7 Wall St, the states that recovered the least by 2011 were mainly up and down the eastern side of the country:

41. Maine
42. Montana
43. New Hampshire
44. West Virginia
45. Arkansas
46. South Dakota
47. Pennsylvania
48. Connecticut
49. New York
50. New Jersey

New Jersey, for example, only saw a 0.2% decline in unemployment from its peak and had -0.5% GDP growth. The states that recovered the best resembled a bit of a smorgasbord with no obvious trend:

Michigan
Ohio
South Carolina
Utah
Oregon
Florida
Indiana
Tennessee
Missouri
Arizona

The way back up doesn’t always follow the way down.

COVID-19-Induced Recession Outlook

As the old military saying goes, “Generals fight the last war.”

Indeed, World War I saw cavalry charges in its first year. And the French built a giant, super trench after the first World War (the Maginot Line) that proved completely ineffective at the beginning of the second.

Likewise, what happened in the previous recession does not necessarily show us what will happen in the next. That being said, a recent analysis from ATTOM Data Solutions indicates that the highest-risk areas are pretty reminiscent of 2008:

As you can see, the Southwest—most notably California—and Florida once again appear to be at the epicenter of whatever fallout is to come. The big difference is that it looks like New York, New Jersey, and much of the Northeast may join them this time.

BiggerPockets’ own G. Brian Davis sums up the results as follows:

“Worryingly for New Jersey and Florida, they claim nearly half (24) of the 50 highest-risk counties.

“With its high tax burden and overpriced housing markets, New Jersey faces particular risk. It has the dubious honor of 14 counties counted among the 50 highest-risk markets in the country. That’s two-thirds of its counties that met the minimum data threshold!

“Florida offers up another 10 of the top 50 highest-risk counties.

“Other high-risk states center around the Mid-Atlantic region: Virginia, Delaware, Maryland, New York. Some Southern states also face high risk, including North Carolina, South Carolina, and Louisiana. And New England as a region can expect to get hit hard, with its high taxes, overpriced markets, and population outflow.

“In the other extreme, Texas claims 10 of the bottom 50 lowest-risk markets. Colorado and Wisconsin also represent particularly low-risk states.

“Only two counties in the West and five counties in the Midwest (all of them in Illinois) fall in the top 50 for highest risk.”

I would agree with Davis’ analysis entirely, except regarding New England, which survived 2008 well and looks relatively secure in ATTOM’s analysis.

It should also be noted that New York and New Jersey are the epicenter of the coronavirus pandemic in the United States, with over one-third of the country’s cases in those two states alone. These states will therefore likely have to stay locked down longer than others in order to contain the virus, causing even more economic hardship there.

The Effect on Real Estate

Overall, we are clearly already in a recession and the real estate market will likely be hit to one degree or another. Indeed, Redfin already shows listing prices have come down 6.4% ($21,000), and month-over-month listings have fallen 33% since the beginning of the year. That being said, the markets are spooked right now so it’s impossible to tell how deep this will go.

Predictions are, of course, always to be taken with a grain of salt. Regardless, given what happened in 2008 and the results of the ATTOM’s study, it would appear investors should be extra cautious in the Southwest, Florida, and the Northeast. On the other hand, the Midwest, Southeast (other than Florida), New England, and the Northwest will—in all likelihood—do better.

Of course, doing better in a recession is a relative term. All real estate investors should practice extra caution right now and insist on better deals than before until the fallout becomes clear.

How do you think the real estate market will fare during COVID-19 versus the Great Recession?

Share with a comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.