News of a possible housing market correction often makes many Americans worried about the global economy, but that concern may be unfounded. An improvement is not necessarily a bad thing. This can help improve housing demand and inventory when property values rise faster and higher than normal.
Housing market improvements affect people differently, and there are both pros and cons to consider depending on whether you’re buying or selling. For the real estate investor, a market correction can represent a great opportunity to buy a property at a discount and grow your investment portfolio.
What is housing market correction?
A housing market correction occurs when the real estate market declines and property values decline. A housing market correction can be regional or national and occurs when prices exceed market capacity.
Rather than being a cause for concern, a correction could benefit the overall economy as the real estate market returns to sustainable levels. The overall value of the real estate market typically decreases by 10% or less in a correction.
A housing market correction is very different from a housing bubble and market crash. A housing bubble occurs when home prices rise rapidly due to limited supply and high demand.
In a housing bubble, home values are driven far above what the market can sustain when the bidding war begins. Speculators hoping to make quick profits also contribute to the rapid price rise. The bubble then bursts, and prices fall when demand decreases or supply increases (or both).
Unlike a housing bubble, where prices decrease rapidly and significantly, housing prices fall much less and are slower to recover. Lower prices allow buyers to get better deals and more homes to choose from. Sellers, on the other hand, may get less, and it may take longer to sell their homes.
What is the reason for housing reform?
Several factors may be contributing to the housing market correction. However, not all factors need to be present for an improvement to occur. Property values can decrease with just one.
First, the availability and affordability of mortgage loans may cause the housing market to contract. Getting a mortgage can be difficult due to economic uncertainty. For example, news of the closure of a local manufacturer that employs many people may cause local lenders to be more cautious in approving home loans.
Lenders may also tighten their lending standards during a recession or when analysts predict a recession is imminent. Fewer people would then qualify for mortgages, resulting in a decrease in demand for housing.
Job loss is another important factor. During economic contractions, many companies reduce their workforce to save money, streamline processes, and remain competitive. This results in fewer people who can qualify for mortgages.
Finally, rising interest rates directly affect the cost of borrowing. Depending on the amount borrowed and the term of the loan, a 1-2 point interest rate increase can add tens of thousands of dollars to the total cost of borrowing over the life of the loan. The increased monthly payments make home ownership unaffordable or force buyers to settle for less expensive homes.
How do housing reforms affect buyers?
If you’re thinking about investing in property during a housing improvement, there are some important pros and cons to consider. Be sure to consider these and other factors carefully before making an investment decision.
Pro: Properties are more affordable
As an investor, the primary advantage of home improvement is that you can take advantage of lower home prices. This may allow you to get a great deal on new properties or to buy more properties.
Pro: You can have more shopping options
If fewer people buy homes because of economic uncertainty or rising interest rates, the market may have more inventory to choose from. This can allow you to buy a property that best suits your preferences and needs. This could also mean that there is less chance of a bidding war between buyers.
Pro: Your rental properties may be in high demand
When fewer people buy homes, demand shifts from buying to renting. As a real estate investor, the demand for your rental properties may increase during the housing reform. This may allow you to charge a premium or be more selective with tenant applications.
Con: You may have fewer shopping options
This does not contradict the previous point. When real estate prices fall, some sellers may take their homes off the market to wait for better market conditions, resulting in reduced inventory in some locations. Whether an improvement has more or less inventory will vary by location.
Con: Strict lending requirements
If market uncertainty is a factor that has contributed to the correction, lenders may tighten their lending standards and make loans more difficult to obtain. However, that doesn’t mean you can’t get the money you need to grow your portfolio.
If getting a loan through a traditional lender isn’t possible, you may be able to get the money you need through a hard money loan or private lender. Although these lending options typically charge higher interest rates, you may be able to refinance after the recovery ends and the economy stabilizes.
Con: High interest rates
Because an increase in mortgage rates is a common reason for improvements, you may have to pay more interest over the term of the loan. This can represent a significant increase in the cost of borrowing.
Con: Potential reduction in home value
If you buy a home during a market correction, the value of the home may decrease after you buy it, reducing the equity in your home. It can also result in a situation where you home is underwater, meaning you owe more on your mortgage than the home is currently worth.
How do housing reforms affect sellers?
Because of the drop in prices, home improvements may not be the best time to sell. Some important considerations for investors are; However, it may make selling during this time a smart move.
Pro: Sell an underperforming asset
Although a housing correction occurs when national prices decline, selling may make sense when you have an underperforming property or a property that is challenging to maintain. Removing it from your portfolio allows you to reinvest in assets with more long-term potential.
Pro: Reduce or eliminate debt
If you are experiencing cash flow or liquidity problems, selling a home or other investment property in housing improvement may allow you to reduce or eliminate debt. Whether this is a viable strategy depends on how much equity you have in the property and how much revenue it generates.
Con: Your home may sell for less
As home prices improve, you may find offers lower than before the market downturn. However, this may not always be the case. The location of the home can be an important factor. If the home you’re looking to sell is in a popular tourist destination with strong demand for short-term rentals, your home may sell at a premium.
Con: It may take longer to sell your home
When interest rates rise, and there are signs of economic uncertainty, fewer people may be interested in buying a home. This can result in more properties for people to choose from, which could mean you receive fewer offers and your home stays on the market for longer.
Con: Buyers may be more demanding
When prices drop, and there is less competition, buyers may request more seller concessions to sweeten the deal. For example, they may ask the seller to pay part or all of the closing costs. They may also request upgrades to the home or seller to include furniture and accessories.
How long do housing improvements last?
It is often difficult to predict how long a housing market recovery will last. This may continue until the factors causing it stabilize. If the housing market improves because of an increase in mortgage rates, for example, the improvement may continue until the Federal Reserve stops raising rates, inflation calms, and consumer confidence rises. .
Because the duration of the housing market recovery is uncertain, it may not always be beneficial to wait until the market has stabilized to make an investment decision. Depending on your objectives, the long-term goals may outweigh the negative effects of buying or selling when housing prices decline.
What does the market look like after housing reform?
A housing market correction will typically end when housing prices start rising again. Key indicators of stable prices include both an increase in the supply of properties for sale and an increase in market demand.
Although some people are forced to relocate in adverse market conditions due to job transfers and other reasons, many buyers will wait to shop for larger homes or look for better neighborhoods until they believe they can. is that their investment will not increase in value over time. No one wants to be underwater on a mortgage.
How does the housing reform affect real estate investors?
While a housing improvement may present an opportunity to acquire new properties at a discount, some may require a new investment approach to achieve their goals. This can mean investing in different types of assets or using different investment strategies to diversify your portfolio and reduce risk.
Investing in a variety of assets allows you to enter new markets, increase revenue and stabilize cash flow. If you are currently investing in storage facilities, for example, you can take advantage of local rental shortages by purchasing single-family homes to rent on the short-term market in popular tourist destinations.
If you focus primarily on single-family homes as long-term rentals, you can acquire additional homes to rent in the medium-term market. This can allow you to take advantage of the need for corporate housing for travel nurses and other professionals in growing markets.
Focusing on a new investment strategy can be beneficial even when real estate markets are shrinking. If you currently use a short term flipping strategy, such as fix and flip, you will get progressively less when you sell as the market contracts. This could be a good opportunity to try a medium or long term strategy to take advantage of a possible rally in the market.
Bottom-line
A housing market correction can be a great time for real estate investors to acquire property. Because the duration of a correction is difficult to predict, timing the purchase of investments to reduce risk can be challenging.
If you sell a home during a housing market correction, it may sell for less when prices rise. It may also take longer to sell and buyers may demand higher seller concessions. Selling a home or other asset in improvement can still be beneficial if you need to reduce or eliminate debt or remove a poorly performing asset from your investment portfolio.
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Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
