What does a bear market in real estate mean? A bear market is when prices are falling and demand is low. This can be caused by an economic recession or political instability. While it’s certainly not fun to go through a bear market, there are some silver linings: buyers have more negotiating power and can often get discounts on properties; sellers may be more willing to accept lower offers; interest rates tend to drop which makes borrowing money cheaper overall.
If you’re thinking about buying a home during a bear market, just remember that things will eventually turn around so try not to take on too much risk. And if you already own property, hang tight! Prices will most likely rebound at some point.
Let us further explore what does a bear market in real estate mean and what you should do the next time the housing market crashes.
What Does a Bear Market in Real Estate Mean?
In the investment market, a bull market is a period of sustained growth. A bear is the opposite and is marked by a prolonged period of a deep sell-off of assets.
The investment markets are always changing and evolving. To make the best decisions, you need to know what to expect from each phase.
As a real estate entrepreneur, both bull markets and bear markets will affect your investment portfolio.
The real estate market has been on fire lately with prices rising at a record pace in December 2021, but analysts are predicting a downturn in 2022.
A bear market is unlikely as long as there is a buyer’s market for homes, driven by buyers wanting to beat expected rate hikes.
What are the best strategies for trading in a bear market?
Understanding Bear Markets
The stock prices of most companies reflect the expected value of their future cash flow and profit. As expectations about a company’s future growth are not met, its stock price is likely to fall.
Fear, herd behavior, and a desire to protect losses can prolong a bear market.
Markets are in bear markets when the average stock falls 20% or more from its peak. But 20% is arbitrary, just like 10% is for corrections.
In a bearish market, people are more averse to taking risks than seeking them. This is usually the case in a bear market, during which people will avoid speculative investments and opt for safer, more predictable ones.
A bear market is a sustained downturn in stock prices, usually 20% or more, over a prolonged period of time. This can happen due to a variety of factors, such as a weak or slow economy, a burst stock market bubble, a widespread disease, a war, a political crisis, or a drastic change in the economy.
A bear is a market that is characterized by a low number of jobs, a weak economy, and falling stock prices.
Any government intervention in the economy will also likely trigger a bear market.
A change in the federal interest rate or tax rates can be a sign of a coming recession. Investors can also lose confidence in the economy if they think a recession is on the horizon.
When investors are convinced that a downturn is imminent, they will sell off their stocks to minimize their losses. By acting proactively, they can avoid the potential downsides of a market crash.
Major market indices in the US were very close to entering a 20% decline last December 24, 2018.
Recently, the S&P 500 and DJIA fell into bear market territory from March 11-12 in 2020.
The 2007-2009 financial crisis was the longest recession the United States has ever experienced.
The S&P 500 lost a whopping 50% of its value during that period.
When the global coronavirus pandemic hit in February 2020, stock markets around the world crashed with the DJIA falling 38% from its all-time high in just one month.
Thankfully, both the S&P 500 and the Nasdaq 100 recovered by August 2020.
How You Can Profit from a Bear Market
The ‘Buy Low, Sell High’ principle is tried and true in any market, even real estate. There are no guarantees in any investment but the general trend over half a century is that downturns in real estate are rare and only last a couple of years.
For buy-and-hold investors, a bear market can be a difficult time. However, some investors see it as an opportunity to make profits.
Those who have an understanding of the market and can anticipate a bear market can profit by selling short. This means they are betting on a drop in prices in the near future and attempting to sell now, with the intention of buying them back when the market rebounds.
Although this can be a profitable strategy, it is not without its risks and challenges.
Timing a bear market is a difficult task, and the tax implications of doing so can render such a strategy for real estate investors useless.
The best way to keep money safe is to buy on the dips and build up a list of individual investors who will be willing to buy on the downswing.
If and when discounted properties show up, you’ll have a source of funding that you can act on immediately.
Buying stocks or bonds at a steep discount to their intrinsic value is a strategy that many investors use to profit from the long-term upward trend.
There are exceptions to the rule, such as some properties in Rust Belt cities and some over-built markets after the 2007-2009 financial crisis.
The tourism industry is notorious for being one of the first casualties of a recession. This is because people cut back on their spending on travel and vacations when the economy slows down.
During the Global Financial Crisis and the height of the coronavirus pandemic, hotels were the hardest hit by travel restrictions and quarantines.
In general, commercial real estate is considered a safe enough investment that banks are willing to lend 65% to 75% of the value of the property, known as the loan-to-value (LTV) ratio, and sometimes even up to 80%.
Investors who purchased property during the 2009 financial crisis have seen their property values more than double in the past six years, even as they’ve continued to collect rental income.
Many investors who bought in 2009 have seen their portfolios grow by multiples of equity invested.
Bear Markets vs. Corrections
A bear market is not the same as a correction, which is a short-term upward trend that lasts less than two months.
While a correction offers a good opportunity for bargain hunters to buy into the stock market, a bear market is seldom a suitable time to do so.
This is because it can be difficult to pinpoint the bottom of a bear market. Investors who are short sellers or use other strategies designed for falling markets may have an easier time recouping losses.
Between 1900 and 2018, the Dow Jones Industrial Average had 33 bear markets, or periods of falling stock prices, every three years.
The 2007-2009 financial crisis was one of history’s most notorious market crashes.
During those three years, the DJIA fell 54%.
The Nasdaq Composite most recently entered a bear market in March 2022 as the war in Ukraine, economic sanctions on Russia, and rising inflation caused investors to panic.
How to Short Sell in Bear Markets
Short selling can be a great way to make money in a bear market. By borrowing shares and selling them, you can then buy them back at a lower price and pocket the difference. This investment is high risk and can lead to a substantial loss if it does not turn out well.
The profit or loss for short sellers is the difference between what they sold the stocks at and the amount they repurchased them.
If, for example, you short 100 shares of stock at $94, the price could fall and the position could be covered at $84.
The investor pockets a profit of $10 x 100 = $1,000. If the stock price rises, however, the trader will be forced to buy back the stock at a higher price, which could result in significant financial losses.
How to Prepare for a Real Estate Bear Market
It’s unlikely that we’ll see a housing bubble burst but prices may drop slightly as buyer demand cools off.
While demand for homes may fall, it should remain steady. This is because there simply aren’t enough homes for sale to meet current demands.
But it’s always a good idea to prepare for a market downturn, even if it’s just a small one. If you’re a homeowner, this means making sure that you can afford to pay your mortgage each month.
If you’re in over your head, you may want to sell now, while you can still demand a higher price, and move to a less expensive house.
If you’re a real estate investor, it’s time to assess the performance of your income properties. If you’ve had no problem renting them out, then you may not need to take any action. However, if you’re having difficulty finding tenants, now might be a good time to offload a rental property that’s not performing as well as you’d like.
And so it’s a good idea to be prepared for those scenarios, even if they don’t actually come to fruition. Negative events in the housing market can take us by surprise, just as stock values could sink without much warning.
Why Real Estate is the Best Investment During a Bear Market
During a market downturn, there’s still money to be made in real estate. Although the 2007 housing market collapse indeed occurred during a down period, many real estate investors still made a profit.
Real estate has always been a solid investment class during bear markets.
Since 1952, there have been 20 bear markets in the US and only two (2007 and 2009) caused significant damage to the housing market. The other 18 actually saw an increase in home values.
In 90% of bear markets in the last 70 years, buy-and-hold investments in real estate were successful.
Bear Market Examples
The stock market was rocked by subprime loan defaults in 2007. The S&P 500 had hit an all-time high of 1,565.15 on 9 Oct. 2007.
By 2009, it had fallen to 682.55, as mortgage defaults hit the overall economy.
On December 24, 2018, major market indexes have fallen close to bear market territory, with a drawdown of just shy of 20%.
The Dow and S&P 500 both entered bear territory on March 11, 2020. This followed the longest bull market on record which started in March 2009.
The recent bear market was brought on by the outbreak of COVID-19 and the resulting lockdowns. This caused a decrease in consumer demand, leading to a sharp drop in stock prices.
During this period, the Dow fell sharply from an all-time high of almost 30,000 to below 19,000 in just a few weeks.
From February 19 to March 23, the S&P 500 fell 34%.
Two other notable examples of bear markets are:
- The crash of the dot-com industry in 2000, which wiped away 49% of the S&P 500, was the worst single-day percentage loss in the history of the index.
- The 1929 stock market crash was the beginning of the Great Depression.
What does a bear market in real estate mean? A bear market in real estate is when prices are falling and the demand for property is low. This can be caused by several factors, such as an economic recession or political instability. While it’s certainly not fun to go through a bear market, there are some silver linings. If you’re thinking about buying a home during a bear market, just remember that things will eventually turn around so try not to take on too much risk. And if you already own property, hang tight! Prices will most likely rebound at some point down the road even if it takes a while.