A bear market in stocks is when stock prices are down more than 20% from their highest point, as measured by a market indicator. Real estate bear markets can also occur so it is important to learn how they happen. It can lead to a 20% drop in property value, which could have a significant impact on your portfolio. It is important to approach investing in real estate during a bear market with intention.
Bear Market Definition
A bearish market refers to a market where stock prices are falling and encourages selling. This is usually measured by a 20% decline in stock prices, which can be indicated by a benchmark or market index. Bear markets can last for a few days or over several months. A bull market is when stock prices rise again after a bear market.
Although a bear market may be indicative of a larger recession in the future, it is not always true. In a recession, the country’s economy shrinks, and unemployment tends to increase while consumer spending decreases. Recessions can be very difficult financially but they are part of the economic cycle.
What is a Bear Market for Real Estate?
The term bear and bull market is usually applied to the stock market and not the real estate market. If you are interested in the definition of a bear real estate market, it is a substantial decline in property value over a time period. This can be applied to the housing market as well as to commercial real property investments like office space, warehouses, and retail centers.
The financial crisis of the 2000s, which ran from 2007 to 2009, was the most significant downturn in real estate markets. The financial crisis of the 2000s caused housing prices to plunge. It lasted from 2007 to 2009. Millions of homeowners became underwater meaning that they owed more than they were worth and lost their homes to foreclosure.
What causes a bear market in real estate?
Low correlation means that what happens in one market does not necessarily impact the other. A downturn in realty can look like a bear market regardless of how stocks are moving.
In the case of the 2007-09’s housing crisis, a lot of blame can be laid on the unethical lending practices of subprime lenders. The federal regulations that were enacted after the crisis was intended to prevent another similar situation. There are many other factors that could cause a bearish market in real property.
- Supply is decreasing relative to demand
- Rising mortgage rates
- Economic uncertainty
It is difficult to predict exactly where the housing market will be heading. However, understanding the trends can help you to determine if a downturn is likely, and if so how severe.
How does a real estate bear market affect investors?
Bear markets are often seen negatively as they can be associated with economic downturns, and even worse, recessions. A bear market can be a great opportunity for real estate investors or anyone who wants to become one. Depending on the current situation, every sector of the real estate market may behave differently.
Let’s say, for example, you are looking to buy a rental property in order to generate passive income. You might be able to negotiate for great properties if housing prices fall because of a bear market in real estate. You could still rent out your rental income even if the economy is in recession.
A bear market in realty can cause a different reaction to economic downturns. If companies cut back on their expenditures and reduce their physical footprints to save money, office space may not be as profitable.
If you invest in properties with a grocery store, retail space could still be a great investment. People still need basic food items and other household goods, even in difficult economic times. As a hedge against the worst effects of a bearish market, you could invest in a real property investment trust (REIT) or fund that holds properties similar to these consumer staples.
How to Invest In Real Estate in a Bear Market
It’s not that difficult to invest in real estate during a bear market. To fully understand the market you are investing in, you will need to conduct some research and analysis.
You should consider possible risk factors. If you are able to rent the property out at a profit during busy tourist seasons, buying rental property in a growing beach town might be a good idea. However, if the area is susceptible to flooding or hurricanes, you may end up paying more for property insurance, or worse, spending money to repair storm-related damage.
For commercial properties, net operating income is also important. The difference between gross operating income and gross operating costs is called the NOI. This can give you an idea of how much you will see in cash flow and profit. The market’s overall temperature can be compared to the larger economy.
The Bottom Line
In a bear market for real estate, it is important to remember that not all sectors will react in the same way. Depending on the downturn, the housing market might recover faster than commercial properties. You can protect yourself from bear market dips by diversifying your real estate investments as well as your overall portfolio. It’s also always a good idea to use financial software like the Prillionaires net worth calculator to keep track of all of your investments.