Aside from the Great Recession, the last major housing crash was in the 1930s and 1940s during World War II. Accidents are much less common than many think, but the recent scar of the Great Recession has left many worried that we are in a housing bubble after several years of record house price growth.
As the housing data continues to pour in, it is becoming increasingly clear that the real estate market is cooling. Whether or not a housing market crash will follow is yet to be decided, but those concerned can rest easy knowing these three things.
1. The housing market will recover
Markets don’t stay low forever. After periods of recession where values or demand fall, markets will eventually rebound. During the Great Recession, considered one of the worst real estate crashes in history, property values fell 37% over a six-year period. But five years later, the housing market had returned to its pre-recession peak and continued to rise 59% in value over the next five years.
No one wants to see property values go down, but any loss in value is only captured if you decide or are forced to sell during a crash. Remember to take a long-term approach to investing, riding through downturns rather than selling helps avoid a loss. It’s also a good idea to focus on cash flow rather than investment property appreciation, as cash flow can help an investment remain profitable even if the value has fallen.
2. Low leverage is your best risk hedge
In some down markets, rental demand may weaken, resulting in lower rental rates or higher vacancy rates, which may reduce or eliminate any cash flow. If the drop in demand continues for a few months or even a few years, it means that it is your responsibility to float the expenses and costs of the property until it becomes profitable again.
If you are over-leveraged, meaning you don’t have enough extra money to cover these costs, you may be forced to sell while the market is down. It’s a good idea to have an emergency fund for your investment properties. The more you have saved, the better, but having at least three months to cover expenses and debts is a good place to start.
3. Bear markets are buying opportunities
The real estate market after the initial crash of 2007-2008 created huge buying opportunities for those with the knowledge and the capital. Higher inventories and lower demand lead to lower property prices; lower property prices can lead to better returns and appreciation down the road.
It is important to remember that mortgage rates are rising right now and with inflation remaining somewhat unchecked it is likely that these rates will rise. Higher rates mean a higher cost of borrowing, so cash is king after a crash. Those who have the funds or private capital available to take advantage of low prices will likely be rewarded for being able to buy low.
A real estate crash seems unlikely, but no one can really predict what will happen. Fortunately, a bear market doesn’t have to be a bad thing. By keeping these three things in mind, you will be able to easily weather the storm and possibly be in a better position as a result.