A significant drop in home sales is one of the most important things happening in the real estate market today. This has sparked an interesting debate about whether or not we are at the start of a bear market, or if this is just another normal correction.
A bear market is defined as two years with no growth in average house sale prices. We may have already seen that happen here in Canada!
While there’s nothing necessarily wrong with having a down year, it also means people will be more reluctant to buy. They’ll hold off until they feel the market is back on track, which could take some time.
This can sometimes lead to a “hockey stick” effect where nobody wants to buy and the supply goes up, making it even harder to find your dream home.
Fortunately, there are ways you can prepare for a possible downturn like this. Here are our top tips.
Bad financial decisions
A large part of this crash is due to people making poor investment or buying decision in the market. People are spending money they don’t have on real estate or investing in things that aren’t quite right.
There are many reasons why individuals make these bad investments, but one big factor is greed.
People want to make lots of money so quickly that they make very expensive mistakes. It seems like a quick way to achieve that goal is by buying a house that cost twice as much as your budget!
Another reason is when someone you know gets rich off the stock market, it can give you an idea to do the same. You may feel motivated to join in on the fun, only to find yourself with no money left for bills and groceries.
A third cause of a real estate downturn is when wealthy investors pull out. This happens because they cannot sell their property at a price higher than what they paid for it, and thus lose money on it.
When there are not enough buyers, the prices drop even more, creating a vicious cycle.
Bad debt
One of the biggest factors that can contribute to a market crash is bad or poor quality real estate loans. When people run out of money to pay their bills, they sometimes turn to credit cards as a way to get more funds. Many individuals will use their houses as collateral for a loan so that they can stay in their home but cannot afford to make the payments.
Many times, these borrowers fail to realize that even though they put their house up as collateral, the lender still has a right to take the house away if you do not repay your loan. In some cases, this happens because the borrower misses a payment, which is why it is referred to as defaulted banking.
When a large number of homes are taken back by banks due to an individual failing to meet his or her financial obligations, the value of those properties drops. Since most banks rely on the income generated from the properties to remain profitable, lower property values mean less revenue. Reduced revenues then have to be made up through lowered profits or cuts in other areas of the bank, creating additional pressure.
Bad loans
One of the biggest factors that can contribute to a real estate market crash is bad or poor quality loans. This could be due to lack of regulation, lending practices, or problems with lenders not meeting their obligations.
When borrowers cannot repay their loan, they often go into default which then requires another party to take over the property. Because these properties are now in someone else’s ownership, they may no longer generate as much income for the owner.
This drops the value of the property, making it more difficult for others to purchase a home because there aren’t enough high-quality homes on the market.
The overall health of the economy suffers as people don’t spend money buying things or investing in businesses. The situation can get worse if many banks start failing which adds to the fear among individuals about whether or not they will have a place to turn for personal loans.
Bad investments
A large part of real estate investing is buying or investing in properties that will make you money. Unfortunately, this article series has discussed several reasons why these “investments” may not work for you.
Some are due to poor investment strategies or decisions, but more often than not, they are just too expensive to be profitable.
Other times, a property owner might need to sell quickly, which costs them more in sales commissions or they cannot get enough cash offerings. This situation can easily cost them their investment!
A bad market also makes it difficult to find good deals, so investors have to pay higher prices for mediocre or even non-existent returns. All of these contribute to a lower income for your real estate portfolio.
This article will discuss one important factor that can affect the value of a real estate asset: how much its value drops when someone else wants to buy it.
Financial crisis
A financial crisis is when an area of our economy completely breaks down. This can happen due to natural disasters, acts of terrorism or illegal activity, or because someone else has done something wrong. When this happens, people lose trust in the market, banks get closed, and individuals are unable to access money they have put into things like loans.
A significant part of the economy comes from people buying and selling property. If people no longer feel safe investing in real estate, then it will become difficult to exist as we know it today. There could be a total collapse of the mortgage industry, which would have serious consequences for the housing sector and the wider economy.
There have been several large-scale economic crises before (the Great Depression being the most famous) and there’s always a way to come back after them. But only if people once again start trusting the markets to work properly.
What are some ways that we can prevent another major downturn? By reducing risk, anyone can play a role in keeping our economies strong. These strengths depend on each individual but can also be found together in different groups and organizations within society.
Bad lending
In recent years, there has been an explosion in how much credit people can access to buy or rent a house. This is what we refer to as “non-traditional” loans — mortgages that don’t require large down payments or proof of income.
These types of loans have become very common because lenders believe people will pay them back using their own money instead of borrowed funds.
By offering these easy loan options, lenders make it more likely you will run into problems paying your mortgage later on. Because banks are paid to be profitable, they may accept borrowers who shouldn’t really qualify for a loan but can afford to repay it.
Bad loans mushroom when investors turn to the market to get cheap funding by taking out both principal and interest via sharing profits with other buyers.
This is why most people agree that the housing bubble we saw in the past few years was mostly due to investors wanting to profit off rising home prices.
Bad regulation
The housing market has experienced two major downturns in its history due to bad regulations that allowed rampant speculation. In both cases, there was no direct cause such as a natural disaster or economic collapse, but rather vague reasons why the market crashed.
In the case of the Great Depression, people began to speculate on whether or not banks would be able to meet their debt obligations at certain times. This fear caused many individuals to avoid buying or investing in properties, which hurt the real estate market heavily.
Another reason for the crash during the 1980’s recession was over-regulation of the banking system. Banks were so concerned about making too much money through lending that they did not want to lend any more than necessary, which hindered the flow of credit into the economy.
This article will talk more in depth about how regulation can have an effect on the real estate market and some examples of disastrous regulation.
