This website is supported by its audience. When you purchase through links on the site, we may earn an affiliate commission.
Whatever the current state of affairs for house sellers may appear to be, a look back in history warns us that a housing market crash often follows significant price rises. The key is to recall why each catastrophe occurred and look for parallels in today’s market.
In the early 2000s, almost anyone with a pulse could get a mortgage, and house prices skyrocketed. Homeowners who had taken out adjustable-rate mortgages had seen their payments rise by 60% by 2006. As hundreds of thousands of houses went into foreclosure and lenders declared bankruptcy in 2007, the market slowed to a crawl before collapsing totally.
These are just a few examples of property prices reaching historic highs before plummeting to more reasonable levels. It’s notable that stock investors frequently experience stock price falls or even crashes. However, unlike stock market investors who might use swing trading to protect themselves against stock price drops, hedging against a housing market fall is more difficult.
While my swing trading course might be of interest to stock investors, this post will give some of the best ways real estate investors can protect themselves against a housing market crash.
Five Ways to Protect Against a Housing Market Crash
Most experts believe the US will not suffer a collapse on the scale of the 2008 financial crisis. This is due to several factors, including regulatory changes affecting lending processes.
What we call “crashes” aren’t always what they seem. But, more often than not, they signal a market slowdown and downward pressure on property prices. According to history, the property market peaks every 18 years, followed by a small or big crash. It is a normal and expected cycle. When this happens, real estate investors grab the best deals. This way first-time buyers become homeowners.
Follow the below tips to prevent a crash in the housing market from hurting you.
1. Build an Emergency Fund
Examine your financial situation. Are you having trouble sticking to a budget because you are overextended with debt obligations?
To be prepared for emergencies, save enough money to cover three to six months of expenses. You may aim for a larger emergency fund. However, this depends on your comfort level. While trying to be positive, prepare for the worst-case situation.
Steps to take:
- Save three to six months of your expenses in an emergency fund.
- Stop paying off your debts and start saving.
- Refrain from taking on new debt.
- Consider selling high-priced assets (in case you can no longer afford them).
- Get rid of unnecessary expenses.
Remember that this won’t last forever, but you still have the chance to improve your financial status. There are plenty of apps both paid and free available to help investors and homebuyers manage their household finances. One of our favorites is the one offered by M1.
2. Consider Refinancing
If you already own a property, consider whether now is the best time to sell. Consider refinancing your current mortgage and take advantage of the present low rates. Even if you have no plans to sell, you should refinance now to take advantage of the current low rates, which will allow you to sit tight and weather any market storms.
You may be able to refinance at a rate of 2.5% to 3.5%, depending on your financial situation. It can save you tens of thousands of dollars for a 30-year mortgage. It’s not a bad idea to compare refinance quotes.
Home values reflect different factors, including the overall economy, geopolitical events, and, as we have seen, a global epidemic. You may plan for the day the market collapses, even if it’s a soft landing, as long as you understand that it cannot go up in value indefinitely.
3. Do Not Spend More Than You Are Able to Afford
If you overpay on a property, you can almost be bankrupt when the market recovers. You are better off searching for less expensive properties if you’d have to watch every penny to make a mortgage payment.
Overbuying can be risky. To avoid overextending yourself financially, develop a rigorous home buying budget before you begin home hunting and stick to it.
Wait a while if you are considering buying a house. If you’re worried about buying a home only to see its value plummet during a market correction, rent for a year and keep an eye on the market.
4. Make the Maximum Down Payment That You Can Afford
The larger your down payment, the more equity you’ll have in your property. Equity is the difference between the mortgage balance and the value of your home.
That is, how much of the property you own outright. When things get bad, equity can be that which comes between a homeowner and foreclosure. Mark at Financial Pilgrimage wrote a great article on why you should consider paying off your mortgage.
5. Advice to Homeowners Keen to Sell Their Property
Perhaps the present market has temporarily increased the value of your home, and you are tempted to sell it immediately to take advantage of the profits that won’t last forever. If you are planning to sell in the next several years, then now is the time to do. It is because the market is hot, interest rates are low, and you’ll get the best price for your house.
If you’re thinking of selling your home to take advantage of the current market’s high prices, keep in mind that selling high also means purchasing high. To avoid getting stuck, it is essential to secure your living situation before selling your house.
Renting until the market settles is one method to sell your home without needing to buy another right away. In the meantime, go to a financial advisor and a tax expert to find out the right approach to handle the gains from your property sale.
Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
Sign up for a free insight into the Swing Trading 101 program that I’ve developed. It’s the result of thousands of hours of trading over hundreds of thousands of dollars across stock, commodities, options, and cryptocurrencies. It’s designed to help investors take a unique but strategic approach to the markets by teaching them how to diversify and hedge their long-only stock portfolios. SIGN UP NOW FOR FREE.
Tim Thomas has investments in real estate.
This post was produced and syndicated by Tim Thomas / Timothy Thomas Limited.
Featured image credit: Unsplash.