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Are Real Estate Investors Ready To Face The Crash Of The Housing Market?

December 16, 20224 min read

Are Real Estate Investors Ready To Face The Crash Of The Housing Market?

Anyone who has been involved in real estate knows that we are currently going through a recession. Interest rates are at an all time high, and finding a house to purchase is harder than ever.

But what do these things really mean, and how do they affect us?

First, let’s talk about what being in a recession means.

According to the National Bureau of Economic research, a recession is  “A significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

We saw a significant decline in the economy when the Covid-19 pandemic started, with lots of people losing their jobs and struggling to keep their businesses going. Two year later, the economy was still declining, but at least the decline was not significant enough to cause a recession.  

Then, what has changed that has everyone fearing a recession?

The aftermaths of the pandemic and war in Ukraine

Economies around the world are dealing with the aftermaths of the pandemic, including widespread disruption of supply chains throughout Asia... But what’s really taken the world for a ride is the ongoing war between Russia and Ukraine. Economic sanctions against Russia, particularly involving its oil and gas, have greatly affected inflation in the USA

This is what puts the US economy at such a risk of falling into a recession. And how will this recession affect the real estate market?

The current housing bubble in the USA

A housing bubble starts with an increased demand for real estate, while its supply remains limited, or rather, not able to meet with the demand. This lack of supply drives up the prices for the existing properties. 

Catching up with an increasing demand in real estate is not easy; It takes a long time to build a house, or fix it up to sell. While demand can increase fast with economic prosperity when certain demographics entering the housing market. As a result, mortgage rates and benefits become readily available to buyers. 

However,  as a result of the recession, people’s buying power goes down drastically. Non essential expenses are cut, and larger investments like travelling or buying property are put aside or replaced by safer investments. 

Not to mention that massive lay offs may take place, putting people in a much more difficult financial spot, and making employment a challenge for the average American. 

That means that people who are looking for a house no longer have the means to do so. 

And people who may have the means, are not willing to take the risk at such an uncertain time. Demand will decrease and become stagnant, and supply will finally catch up and overtake it.

And what happens when supply continues to increase but no one is buying? Prices will DROP. This is when the bubble bursts. 

How does this affect real estate investors?

Well, it really depends on what your current focus is! 

  • If you specialise in Fix & flips, your business may be at a higher risk. Housing prices in a bubble are extremely high, so, even if you acquire properly at a very discounted rate, a sudden drop in market prices will still likely make you lose money. 

  • If you specialise in buying raw land and construction, you may want to consider renting your newly build property rather than selling it. People struggling through a recession are more likely to look into rentals, and it’s always good to have some cash flow coming your way! 

  • With fluctuating mortgage and interest rates, a lot of people will be facing foreclosures. While still risky, seller financing strategies like subject to deals could be your best investment option. Some remodeling will be required, but you’ll be getting some cash flowing your way by renting out the property. 

Remember, what’s most important right now is to be prepared! Be cautious but take action. You need to understand your numbers, and have a plan for the worst case scenario. If you have all of your eggs in a basket, it may be best to look for different investment opportunities and strategies. Panic is your worst enemy, so surround yourself with people who are taking action and getting ready for the future. 

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Esteban N Andrade

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