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In real estate, homebuyers and investors often find themselves fearing the same event – a housing market crash.
Fortunately, the odds of a housing market crash are frequently overstated and in reality, a housing market crash is relatively unlikely. However, that does not stop people from mistaking market corrections for the early signs of a housing market crash.
So, let’s take a look at crashes and corrections and what you should do when the real estate market hits a downturn.
But first, while it is understandable to be worried about the potential impact of a housing market crash on your investments, it is important to remember that by structuring your investments properly, the impacts of a housing market crash can be greatly reduce. So, if you would like to learn more about how you can structure your financing to protect your investments, click the link below to book a free strategy call today.
What is a Market Correction?
A real estate correction is typically as harmless as the name implies. When a market gets too hot and properties become overvalued, governments will often hike interest rates or impose other restrictions to cool the market back down. As a result, over-valued properties begin to take a dive and the market takes a small hit in order to balance the supply and demand in a particular country or region.
Market corrections happen much more frequently than people expect and are often a key indicator of periods where buyers can take advantage of increased power and control over the market.
What is a Housing Market Crash?
While talk of real estate crashes is incredibly common, the same is not true for actual crashes. When the average home price drops by more than 10 per cent than the 52-week peak value estimated on the home price index, that is considered a crash. Crashes are relatively rare and are usually accompanied by recessions.
What to Do During a Market Correction
Real estate corrections are rarely a time for concern, these are typically great times for new investors to dive into the market and for active investors to consider new possibilities for their investment portfolios.
During a market correction you may want to consider the following:
Hold For the Long Term
One of the biggest mistakes that people can make during a market correction is panic selling and letting go of properties that had great potential for long-lasting success. Instead of allowing yourself to become overwhelmed and selling off your assets early, focus on the long-term impacts of holding the property.
If the investment is stable and paying for itself each month while also providing you a with steady cash flow, why would you get rid of it early. By backing out of a property too soon, you are missing out on the potential appreciation the property could experience over the next few years.
Sell What Is Not Profitable
While you should not panic sell a property, sometimes a market correction can be a good time to become aware of properties that are no longer worth holding. If a property is costing you money to hold on to and has not been for a while, it can easily be a good strategy to let go of that property early in the market correction in order to cash out. That way you can free up cash to pursue other opportunities and options.
Keep an Eye for New Opportunities
Market corrections can be a great time to pursue new investment properties or diversify your portfolio. With over-valued properties on the decline, a correction can provide an excellent opportunity to buy real estate at a reasonable price without the concern of overspending.
Just be careful not to buy too soon or else you may risk taking on more debt than you have to. Ideally try to time out the lowest point in the correction and buy-in there, otherwise wait for the market to begin to slowly rise again.
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What to Do During a Housing Market Crash
Housing market crashes happen much more suddenly than market correction. However, that does not mean you should panic if a crash were to occur. Instead, it is important to remember that crashes typically hit people hardest if they are not prepared, and if you are financially stable, it is much less likely that you will have anything to worry about during a crash.
The Best Plan is to Be Prepared
The best course of action for a housing market crash, is to be prepared before one ever hits. Often, market crashes happen as a result of people taking on more debt than they can manage and foreclosing and defaulting on their homes and mortgages. So, when you are investing, be careful not to carry too much debt and try your best to invest wisely so that you can stay on top of your monthly mortgage payments.
By planning ahead, many investors can typically ride their way through a crash mostly unaffected. This is especially true for investors who build strong emergency funds to protect themselves during an economic crisis.
Hold on to Diverse Investments
Real estate crashes are not always all-encompassing. Sometimes, even if the housing market takes a massive blow, commercial real estate may continue to thrive as normal. So, by making sure your portfolio is full of different types of investment properties, you can reduce the odds of getting overwhelmed by the downturn and losing too much of your hard-earned money.
Remember: A Correction is Not a Crash
No matter what, the most important thing to remember when you see the market begin to turn is not to panic. Often the early signs of a market correction can make people jump ship early in fear of a larger crash that is not coming. Worse yet, sometimes panic selling can become the cause of a housing market crash that could otherwise have been avoided. So, remember, a correction is not a crash, and you should not be afraid of a correction.
Finally, remember that one of the easiest ways to prepare for market corrections and crashes is to ensure that your mortgages are well optimized and affordable to you. That way your risk of defaulting is reduced, and your assets can remain protected. That is why at LendCity, we work with a wide network of lenders to help you find the best rates and financing available to help you build the most secure investment portfolio you can. For more information you can give us a call at 519-960-0370 or visit us online at LendCity.ca Alternatively, click the link below to book a free strategy call with our team at LendCity today.