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Turnkey Real Estate Investing

3 min read

How Big of a Risk Does a Softening Market Pose?

Wed, Apr 20, 2022

housingmarket2022-investinginrealestate-softeningmarket-realestatebubbleIf you look at any real estate headlines, you’re likely to see more than your fair share of negativity and doomsaying. It’s not that we blame people for putting out this content: negativity drives clicks.

This isn’t to say that all their warnings are unwarranted, either. We all know that there are great risks associated with investing in real estate. Even just buying a personal residence is a risk all on its own!

With the market so volatile – having experienced exponential growth throughout the pandemic – it’s unsurprising that predictions of bubbles and crashes are dominating.

But let’s really talk about the risks here.

As a real estate investor, how much extra risk do you really face in today’s market? And, perhaps more importantly, how do you mitigate that risk in the event that the market takes an unfavorable turn?

Here’s what you need to know:

3 Risk Factors in the Modern Real Estate Market

Risk #1 – Overpaying

One of the biggest and easiest mistakes to make in today’s real estate world is overpaying for a property. CoreLogic names the nation’s most overvalued markets as:

  • Destin, FL
  • Homosassa Springs, FL
  • Prescott, AZ
  • Lake Havasu City, AZ
  • Punta Gorda, FL
  • Naples, FL
  • Austin, TX
  • Flagstaff, AZ
  • Cape Coral, FL
  • North Port, FL

The pandemic spurred market activity in the Mountain West and Southeast in particular. In some places, prices grew by as much as 20% and 30% between December 2020 and December 2021. As a result, a lot of those markets are now considered overvalued.

With that said, it all comes down to the math. As a real estate investor, you’re able to look at what you can and cannot reasonably pay to maintain acceptable profit margins for your property. While the high-price nature of the market may reduce your options, it won’t eliminate them – particularly in more affordable southern markets.

Risk #2 – Price Declines

Despite fears of bubbles and market crashes, the risk for housing price declines is actually quite low. Again, according to CoreLogic, only five markets – Prescott, AZ, Merced, CA, Lake Havasu City, AZ, Worcester, MA-CT, and Kalamazoo, MI, are at high risk for price declines over the next year. Only twelve metro areas had a 50% risk or higher. For a third of surveyed metro areas, the risk was under 10%.

While prices may soften, it’s relatively unlikely that they will actually drop. The more likely scenario is that price acceleration will slow – not that value will be lost.

Risk #3 – Market Economics

What increases the risk of a price decline, vacancies, and general investment problems? It comes down to economics. The areas that are high-priced and at high risk for decline are those that are not supported by strong economic infrastructure. They’re suffering from high unemployment, lower income growth, and lackluster population growth.

The areas at the least risk for decline are those supported by a robust economy: growing wages, low unemployment, and population growth. This is true even if the real estate market is overvalued.

3 Ways to Mitigate Today’s Real Estate Risks

Strategy #1 – Pick the right markets.

Your market is everything. Don’t follow fads or give in to the hype. Instead, rely on the numbers. Is the market growing? Is it economically stable? What does rental demand look like? What are the costs of maintenance and reno work? What taxes will you have to deal with?

These are just a few of the questions to answer. All-in-all, long-term investors are in the best position when they target economically growing markets with stable, reliable growth that is neither too slow nor too extreme.

Strategy #2 – Safeguard your finances.

It’s time to put your money management skills into overdrive. Get the best interest rates by safeguarding your credit score. Craft an airtight saving and investing plan. Cut unnecessary costs. Reassess your finances and budget to account for inflation. Diversify your streams of income with more investments, different investments, and other sources of passive income. The more you can do to save and invest, the smaller the chance of a market crash leaving you high and dry.

Strategy #3 – Make the most of what you have.

Buying properties right now is undoubtedly costly. It’s only going to be more costly as interest rates rise. While we would say now is the time to jump on opportunities if you’re able, you’re not stuck if you can’t make money moves just yet. Focus on maximizing the earning potential and efficiency of your existing investments. This means investing in high-quality management, revisiting rent costs, and exploring incentives to keep residents right where they are for longer.

 

Mitigate your risks by investing with the best of the best at REI Nation!

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Chris Clothier
Written by Chris Clothier

Entrepreneur, writer, speaker, ultra-endurance athlete, husband & father of five beautiful children. Chris puts these natural talents on display every day. As a partner at REI Nation, Chris addresses small and large audiences of real estate investors and business professionals nationwide several times each year. Chris is also an active writer, weekly publishing real estate, leadership, and endurance training articles.

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