These housing markets are the most vulnerable in recession

New Jersey, Illinois and inland California have the highest concentrations of the housing markets that are most vulnerable in an economic downturn due to high unemployment rates and low affordability, according to a recent report from real estate data firm ATTOM.

Markets in the New York City and Chicago areas, in particular, were most vulnerable, according to ATTOM's Special Housing Risk Report. 

The report highlights the relative vulnerability of counties nationwide in an economic downturn.

It doesn't suggest "that markets with a relatively high-risk rating are in danger of some sort of imminent housing market catastrophe," Rick Sharga, ATTOM executive vice president of market intelligence, told FOX Business. 

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However, the housing market has cooled so rapidly in recent months that some economists from the National Association of Realtors think the industry has tumbled into a recession. 

Homebuilders' sentiment about the industry plunged to the lowest level in two years, and buyers are retreating from the market as they cancel home sales at the fastest pace since 2020 and builders rethink construction.

"We’re witnessing a housing recession in terms of declining home sales and home building," Lawrence Yun, chief economist for the National Association of Realtors, said recently.

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ATTOM's report, based on gaps in home affordability, underwater mortgages, foreclosures and unemployment during the second quarter, showed that 33 of the 50 counties most vulnerable to potential declines were located in New Jersey, Illinois and California. 

Nine of the top 50 most-at-risk markets were around the New York City area, including Kings and Richmond counties, which cover Brooklyn and Staten Island. Six were in the Chicago metropolitan area, including Cook, Kane, Kendall and McHenry counties, according to the data.  

Thirteen of the most-at risk markets were spread out along northern, central and southern California. This includes Butte, Humboldt, Shasta and Solano counties in the northern part of the state as well as Fresno, Kings and Madera counties in central California. Additionally, Kern, Riverside and San Bernardino counties in the southern part of the state were also among the California markets most at risk. 

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"The most vulnerable markets shared two fairly consistent attributes: unemployment that was higher than the national average and very poor affordability," Sharga said.

In determining affordability, the firm looked at how much of the median household's income would be required to buy a median-priced home in the market. The national average is 31.5%. But, in many of the riskiest markets, it was above 50%, the data showed. 

"Mortgages with that high a debt-to-income ratio have always been considered very risky, as those borrowers have a hard time handling other expenses or building up cash reserves they can use in an emergency," Sharga added. 

What wasn't surprising, according to Sharga, was that a lot of the highest-risk markets were in some of the most expensive metro areas in the country, such as New York City and Chicago, where affordability is weakest. 

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By comparison, the South and Midwest had the highest concentration of markets considered the least vulnerable during a downturn. Counties in that part of the country have more affordable homes and lower levels of underwater mortgages, foreclosure activity and unemployment.  

According to the data, 25 of the 50 counties least vulnerable were in the South, and another 14 were in the Midwest.