Few events can derail a hot housing market faster than a full-blown real estate crash. Property values plummet, often falling 20-30% or more. Homeowners lose equity while many end up in foreclosure. For buyers, opportunities abound but economic instability reigns.
While crashes feel sudden, certain red flags tend to appear first. Heeding these warnings and preparing prudently could mean the difference between profits and financial ruin. So what are the signs of an impending crash?
Recessions Signal Less Buying Power
Affording a home becomes difficult when the job market sinks and wages decline during recessions. With fewer qualified buyers in the market, demand drops even as supply stays steady. Excess inventory triggers sellers to lower prices.
Rising Interest Rates Reduce Affordability
Interest rate hikes make mortgages and refinances more expensive. Higher rates price some buyers out of the market. Existing homeowners also curtail spending as more money goes toward interest payments. This impacts the broader economy.
Oversupply and Speculation Create Volatility
When investor speculation drives overbuilding, or when existing homeowners list en masse, available housing inventory surges beyond what organic demand can support. As supply outpaces demand, bidding wars end and prices tumble.
How to Prepare For a Housing Market Correction
If you sense an impending correction, how should you prepare? Here are a few tips:
- Avoid overpaying or waiving contingencies — markets rebalance
- Raise down payment amount to 20% or more
- Seek fixed rate mortgages over adjustable rates
- Consider buying in more affordable areas
- Prepare for a longer ownership timeline
- Cut other costs early to pay down mortgages faster
Staying informed and making smart moves can help you ride out a housing crash. While market corrections can’t be avoided, you can minimize their impact through careful planning.
