When it comes to investing, the term “bear market” refers to a period when stock prices are declining. Stock values drop 20% from their previous peak during a bear market. Some bear markets are brief (such as the one that occurred in early 2020 following the outbreak of COVID-19), while others may endure for longer periods of time.
When home values drop by 20%, it’s usually due to an economic collapse. As a result, preparing for this scenario when you’re a real estate investor or homeowner is critical.
Are we getting close to a real estate bear market?
To be clear, we are not currently in a bear market in regards to stocks or real estate at this time. In fact, home prices have continued to rise for well over a year now.
In Feb. 2022, the median sale price of existing homes was $357,300, according to the National Association of Realtors (NAR). This is a 15% increase from one year prior.
As of yet, the NAR doesn’t have any comparable data for the month of March. However, based on market activity, there is no cause to anticipate a substantial drop in median house prices for the month.
While property values are presently healthy, they may shift in the next year for a variety of reasons. First, house values are just about unsupportable on a national level. Second, mortgage rates have increased dramatically in recent months, making borrowing more expensive than it has been in years. That is expected to result in a gradual drop in buyer interest.
If mortgage rates continue to rise, which is likely, purchasers may withdraw from the market at a quicker pace. This might result in homes prices falling dramatically.
How to be ready for a real estate bear market
There’s a good chance that we won’t see a major housing market collapse in 2018, or even the year after. What’s more probable is that home prices will gradually decline to more reasonable levels as buyers reconsider their plans.
Another reason why house values are unlikely to plummet is that there remains a lack of inventory. As a result, while buyer demand may decrease, it will not vanish.
However, it’s a good idea to be prepared for a real estate bear market in case one occurs. That means making certain you can pay your monthly mortgage on time. If you’re in way over your head, you might want to think about selling now while the price is still high and moving to a property that is more affordable.
If you have income properties that you have invested in, analyze their performance. If you have had no trouble renting those houses out, there’s probably nothing to be done. Otherwise, it may be the best time to sale a property that is not performing well.
While there are no indicators immediately suggesting a housing market downturn, sometimes terrible events can catch us off guard –- just as stock values may drop without notice. As a result, it’s prudent to be prepared for those possibilities, even if they don’t materialize.