Every real estate investor wants to know as early as possible when to expect a market downturn. This is of crucial importance when establishing a proper plan of action in case of a market crash.
Whether we’re talking about commercial real estate or residential real estate, here are the three main early signs of a real estate market downturn. Sure enough, we will also review the possible strategies to implement in the event of a real estate market collapse.
#1 Tumbling Market Forecast
Owning a rental property has become a great way to generate money in the United States over the years. Generally speaking, the US real estate market trends have indicated that the market is active and represents a good business opportunity. Therefore, many people have decided to buy an income-producing asset and make money from the rental income they receive for renting it out, resulting in an increased demand for real estate.
This condition of the real estate market is a characteristic of a housing bubble. This is a state which occurs periodically and marks a quick and steady increase in the market prices of real estate properties.
It sounds like the perfect opportunity to be owning a rental property, right? Well, not entirely. At some point, the prices of commercial real estate and residential real estate properties reach a peak which cannot be sustained any longer. At this point, the market faces a state of recession or a market downturn.
Currently, more and more real estate investors are starting to fear that the US housing bubble may soon burst and a real estate market downturn will occur. That is why it is of crucial importance to review the market predictions and be aware of any upcoming changes regarding your real estate investing business. There are two main signs which identify a tumbling market forecast and a possible market downturn:
Decreasing Demand and Increasing Supply of Real Estate Properties
It is absolutely expected that the market will fluctuate and show signs of decrease and increase in demand throughout the year- that is not necessarily a sign of a real estate market downturn. When we are talking about a housing market downturn, we are no longer reviewing the regular changes in the market, but rather steady real estate market trends.
One of the first characteristics of a real estate market downturn is, namely, the lower number of sales. This indicates that buyers are more cautious about choosing an income generating asset or a home. In the state of a market crash, there is a higher supply of real estate properties and an increased average time for selling an investment property.
Decreasing Prices of Real Estate Investments
Logically comes the second indicator that the real estate market has slowed down and might face a market downturn. This is the decrease in prices for properties. Once the housing bubble pops, the prices for selling an investment property start to decline. Thus, if you notice such a phenomenon, it will be time to reevaluate your business strategy and prepare for a real estate market collapse.
#2 The Economy Seems Unstable
Every successful real estate investor knows that it is simply not enough to follow only real estate investing news. When discussing the early signs of a real estate market downturn, the US or even the global economic situation might be used as an early key indicator. For instance, if the economy’s overall direction is a slowdown, there is a high chance that this trend will also influence the real estate investing business. Consequently, this might indicate a potential market downturn.
The explanation behind this is quite simple- it is hidden in the correlation between the two realms. If the economy does not show steadiness or development, it is likely that real estate investors will not rush to finance new assets. This is due to the fact that, for example, there will be fewer people willing to rent/buy a property during economic instability. Consequently, you should keep an eye on the overall state of the economy in the country and worldwide to be able to notice the early signs of a real estate market downturn.
#3 Government Policy Changes
Other factors that can have a negative influence on the market and lead to a market downturn are government policy changes. Such changes might have an effect on the taxation system, for example. They might also influence the interest rates when taking out a mortgage loan. Let’s not forget about the possible requirements one has to meet when renting out an investment property, reporting rental income, etc.
Any significant changes in the above might lead to a real estate market downturn. Consequently, it is important to review government policy changes regularly. Being aware of the possible risks you are taking when investing in real estate is crucial for your success.
What Should You Do in Case of a Real Estate Market Downturn?
“What should I do in the event of a market downturn?” you may ask. Well, there are a few things you can implement in your business strategy. First of all, it is important to check the market predictions and logically incorporate the data into your business. Selling an investment property, for example, might be a possible solution in the early stages of a housing market downturn.
Nevertheless, if selling an investment property does not sound good to you, you might also attempt to take advantage of the current market downturn. How? Buy and hold real estate! You can implement the buy and hold real estate strategy if you purchase an investment property when the prices are the lowest and sell the investment once the real estate market reaches peak again.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
However, you should be careful when making any decision during a market downturn. We advise you to carefully review the property investment data as well as evaluate the current situation beforehand. Mashvisor’s investment property calculator can help you in the decision making process. The tool can provide you with the necessary property investment data.
The question of whether or not we can protect ourselves from a real estate market downturn stands open. Even though the situation sounds extremely scary for many real estate investors, it is important to note that if you evaluate the phenomenon on time and take actions, you will be able to protect your business.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.