Recession-Proof Metros: Redfin Report

[Victor Saumarez]

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.