There’s an ongoing debate among economists about the state of the real estate market. While the first months of the year give us some idea of where we’ll be throughout 2023, some are still fearful that the market will crash. After all, we’re coming off unprecedented highs, through inflation, and into a recession.
It’s easy to believe it will happen. But we’re looking firmly at a market correction – not a crash – and this is why.
3 Reasons the Real Estate Market Is Correcting, Not Crashing
Reason #1: Inventory shortages won't allow the market to crash
The balance of supply and demand plays a key role in the real estate market, especially where market crashes are concerned. Let’s refer to the 2008 housing crash – aka, the Great Recession – wherein real estate prices plummeted with the collapse of Bear Stearns. At the time, the real estate market was hugely speculative and running amok with poor lending practices. The crash resulted in a swath of foreclosures on top of a glut of existing inventory.
Between demand drying up overnight, there were so many houses that the supply-and-demand balance was thrown thoroughly off-kilter.
That’s not the case now. The construction sector struggled in the wake of the Great Recession with many companies consolidating or going under entirely. Because of this, new inventory was slow to catch up with recovering demand, which remained true for over a decade – and even now.
Tight inventory means that demand would have to dry up to throw the balance off. Even with rising mortgage rates tempering demand, we’re still seeing that it outweighs supply. Supply may slowly catch up and bring a sense of balance back, but the current state of supply will keep the market from crashing.
Reason #2: Prices aren't dropping dramatically
A crash demands that real estate prices drop by at least 20% and do so very suddenly. Even then, context is necessary. The pandemic-era market saw dramatic price growth of some 40%, reaching unsustainable heights and prohibiting first-time homebuyers from entering the market.
To slow down the market and correct inflation, the Fed increased interest rates. This not only reduced market demand but also slowed home price growth. It’s important to note that here, decreases in values or asking prices are not necessarily a negative thing.
When the market hits unsustainable levels, it spells trouble for everyone, even if there are short-term benefits. Price correction is necessary. Even so, we’re not seeing dramatic price drops, just slow adjustments, and not even in all markets.
The Great Recession saw virtually every real estate market in the nation in jeopardy. We’re not seeing a uniform reaction to the state of the economy or interest rates. Some markets have remained virtually unchanged, while particularly overvalued markets will continue to see a greater correction.
Reason #3: Real estate investors will keep the market's momentum
Real estate investors play a critical role in the health of the real estate market. It’s easy for people to blame investors for a lack of inventory or for “taking over” certain markets. But investors provide not only crucial housing options in an increasingly unaffordable and unfriendly real estate environment, but they stimulate demand.
Investors were the ones who kicked off market recovery after the Great Recession. They singlehandedly reignited market demand.
While the climate is less amiable to investors today, the mighty need for rental housing combined with the time-tested wealth-building potential in real estate means that it will continue to be an attractive investment option. Investment activity will persist, and that’s going to keep the market going even if the worst-case scenario comes true.
So, What Should Investors Do?
If we’re looking at a market correction, investors have due diligence that needs doing. We’re not prepping for a doomsday scenario (and wouldn’t be even if we were approaching a market crash), but action is required nonetheless. Investors do well to:
- Refine their portfolios, including culling properties that are not generating income. You want your portfolio tightly in line with your goals.
- Reduce debt. Leverage can be a great tool, but investors should be wary of becoming overleveraged, particularly in a market that sees slowing value growth or negative price trends.
- Maximize existing investment potential. In preparation to acquire future properties, be sure your current assets are running smoothly and efficiently.
- Save up. The softening of real estate prices will create more opportunities for investors. You want to have the cash on hand to make acquisitions, so start saving up for down payments and emergency funds.
We all have to pivot when the market shifts. As long as you do your due diligence and act to take advantage of the market, you’ll be in good shape!
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