I paid close attention as a 90-year-old man explained that corrections were inevitable, drawing on his experience of surviving (and prospering) through seven complete real estate downturns.
Although some lunar tides reach higher or retreat further, a housing market crash is as inevitable as an outgoing tide. This feels like a lunar tide to me.
If this comparison sounds strange to you, it’s possible that you were either too young or didn’t interact with the previous real estate downturn to understand the heartache that was being discussed. Or you started to think that subprime lending was the only reason the bubble burst.
As predictable as an outbound tide is, it’s also healthy. Without it, life breaks down. During the salient retreat, the ocean’s littoral zone gets a generous dose of oxygen. PH, minerals, and nutrients are recharged. The water-top insulation is peeled back allowing gestation to begin.
Greed and unwholesome motives get checked. Extremes get averaged. Normalcy takes a foothold. Answers become exposed.
But who gets injured in a downturn of any magnitude? Don’t foreclosures increase?
In any traffic pattern, there will undoubtedly be accidents and injuries. I compare the real estate cycle to a round-trip commute, where one day’s travel is equivalent to an orbit lasting ten years (approximately).
When is an accident in commuting more likely to occur?
Someone is trying to cut the line (get rich quick)
Everyone has witnessed a driver take advantage of the breakdown lane in an imprudent and extremely dangerous manner.
Godspeed! Maybe that driver IS experiencing a real emergency, or maybe they’re just oversleeping their alarm because they partied the night before. That lack of preparation or foresight significantly increases the likelihood of harm and death to others.
Texting and driving (acting on impulsivity)
Some people’s approach to the buy-cycle can be compared to impulsivity, which is acting without a plan. The way shares are traded on Robinhood is similar to someone trying to “get into flipping.”
These poor choices in real estate are frequently the ideas of someone else. A timeshare, a seasonal camp, a multifamily in a county you’ve never been to, a Maine home on a lake whose water is entirely covered with lily pads, a cute home in a town with no downtown and, it turns out, no fire department or gas station either, or the next thing you know, you’re the owner of (pick one).
Prior to obtaining a license, all of these factors can be discussed. or before you buy a piece of real estate (see our article about pro-active vs. reactive home buying HERE).
What about job loss and illness as it relates to foreclosure?
Both of these uncontrollable behaviors—surging markets and agonizing downturns—can and do happen in all tidal cycles.
Similar to how a medical emergency can happen to a driver in any traffic pattern (although heart attacks are more common in the stressful morning commute), job loss and illness phenomena are present in all stages of the real estate cycle.
My recommendation on avoiding the risks that a downturn represents are:
This also applies to your day job; how certain are you that your boss can weather a storm?
If you are purchasing with a partner, how well do you get along with that person? If it’s your college roommate, how will you manage the property maintenance if they take a tech job in California?
Despite popular belief, you must wait for a buyer because they aren’t always eager to purchase.
The administrative costs of trading real estate exceed five figures.
If you hit a speed bump that forces you to sell and you don’t have backup (reserve) funds, you will probably go under. Make sure you have enough money saved to avoid having to sell when you hadn’t intended to.
Don’t buy impulsively or try to make a quick hit. Sure, some people will succeed in cryptocurrencies while others will find success in real estate, but in order to balance the odds, you’d need to have a strategy. A home buying plan should be with a long horizon. An investment strategy should outline your competitive advantage and your contingency plans for potential value loss or decreased rental income (both of which are likely to occur simultaneously).
While the guidelines may not always be exact templates, many success stories can be traced back to these fundamental ideas: dealing without emotion, adhering to a written plan, being patient, seeking wise counsel, thinking long term, understanding that we are always in a cycle, and using delayed gratification for a greater reward.
Save some dry powder if you’re already an active investor for dollar-cost averaging on the “backside of the wave.” If you own a home, one way to lower your risk is to consider making improvements to it rather than moving or upsizing. Consider investing in energy efficiencies and capitalize on low-interest rates.
Despite the fact that my 2008 losses caused me to delay retirement by ten years (I had to liquidate my retirement funds to cover a shortfall on a real estate investment), I can honestly say that while I wouldn’t want to go through that struggle again, I also wouldn’t want to have avoided it.
I am now a better tour guide in my field thanks to the IP that was free for the taking on that journey. I provide daily, unpaid assistance to those who are curious about learning This has given the people I am gifted to work with 100 times more than the value of my personal loss. I don’t really consider my work to be “work,” and since I enjoy it so much, I don’t consider it to be work.
1His Boston-based rental portfolio tops 20,000 units.
FAQ
How does a housing market crash affect homeowners?
Homeowners can no longer simply flip their way out of their homes if they cannot afford the new, higher payments because they owe more on their mortgages than their homes were worth. Instead, they will experience home foreclosure and frequently declare bankruptcy as a result.
Will housing be cheaper if the market crashes?
When the housing market crashes, we typically anticipate a minimum 20% drop in prices. Unless we experience a severe recession with high unemployment rates, this is far from what experts are currently projecting. Even then, it likely wouldn’t be as bad as 2008.
What happens to mortgages during a recession?
The Federal Reserve typically lowers interest rates during recessions to encourage people to spend money. Lower interest rates may make it simpler for you to pay off any existing mortgages.