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Buying a home is often seen as a milestone for many, but there can be obstacles to doing that. Especially if, right after you buy your dream home, the housing market crashes. It tends to be a concern when you hear about real estate housing market crashes regularly making headlines. Will the value of your home plummet? How will this impact your financial health? Here’s what a housing market crash means for a new homeowner.
Read: 3 Ways To Recession-Proof Your Retirement
What Does a Housing Market Crash Mean?
First, here’s what a housing market crash actually means–it’s a significant and rapid decline in home value.
This can be triggered by various economic factors, such as:
- High unemployment rates
- Increased interest rates
- Economic recessions
- Overvaluation of properties
- Tightening of credit conditions
It’s a period marked by uncertainty. You’ll often hear “Is the housing market going to crash?” become common in everyday conversations.
The Immediate Impact on Your Home’s Value
If you buy a house and the market crashes soon after, the most immediate effect you’ll notice is on the value of your property. It’s likely that your home’s market value will decrease, sometimes significantly. This can be unsettling, especially if you’ve invested a large portion of your savings into the down payment. However, it’s important to remember that real estate is typically a long-term investment. Market fluctuations, even sharp ones like during a crash, tend to stabilize over time.
Purchasing a home right before a market crash means:
- Decreased market value: The market value of your new home may drop, sometimes significantly, which can be distressing if you’ve invested a significant amount of your savings.
- Long-term perspective: Real estate is generally a long-term investment. Despite short-term market fluctuations, property values have historically increased over time.
About Fixed-Rate Mortgages
If you have a fixed-rate mortgage, your monthly payments will remain the same, regardless of the market’s condition. This stability can be a relief during market downturns. However, if you have an adjustable-rate mortgage, you might face increasing payments, which can be challenging if the market crash is accompanied by a broader economic downturn affecting your income.
How To Deal Negative Equity and Underwater Mortgages
One concern homeowners and prospective homeowners alike have is ending up with an “underwater mortgage,” if a housing market crash were to happen. Being underwater can limit your flexibility, making it challenging to refinance or sell without incurring losses. It’s a tough spot, but not necessarily a permanent one, as market recovery over time can help bring your home’s value back up.
What Is an Underwater Mortgage?
An underwater mortgage is one where you owe more on your mortgage than your home is worth. This occurs when you owe more on your mortgage than your home’s current value. It can limit your ability to refinance or sell without loss.
How Quickly Can Your Home Recover After a Market Crash?
Despite immediate setbacks like a market crash, history shows that real estate markets have a tendency to recover and grow over time. This recovery can play a crucial role in restoring and even increasing the value of your property.
Historical Trends
Looking at past housing market crashes, such as the 2008 financial crisis, provides insight into the recovery process. Although the crash led to a significant drop in property values, over the following decade, the market not only recovered but in many areas, saw property values reaching new highs.
Local Market Dynamics
Recovery can vary significantly based on location. Some areas might bounce back quicker due to factors like job market stability, population growth and local economic conditions. For example, a city with a growing tech industry might recover faster than one reliant on struggling manufacturing industries.
An Example
Consider a scenario where you purchase a home for $300,000. If the market crashes and your property’s value drops by 20%, it’s now worth $240,000. While this reduction is concerning, historical patterns suggest that over the next several years, the market is likely to recover. As the economy stabilizes and grows, your property’s value could not only return to its original price but potentially exceed it, especially if you’ve made improvements to the property or if the area becomes more desirable.
Buying a House as a Long-Term Investment
Real estate should always be viewed as a long-term investment. Property values can swing in the short term, but historically, they have increased over the long term. If you don’t need to sell your home during the crash, it’s often best to wait it out. The market typically recovers, and so will the value of your home.
While short-term fluctuations can be alarming, real estate should be viewed as a long-term asset. Patience is often rewarded as markets tend to move in cycles, and downturns are typically followed by periods of growth and stability.
Potential for Future Gain
Believe it or not, a market crash can also present opportunities. If you’re in a stable financial position, a downturn in the market might offer chances to invest in additional property at lower prices. This strategy, of course, requires careful consideration and should be based on thorough research and financial advice.
How To Protect Your Home in Case of a Market Crash
While you can’t predict a market crash, you can prepare for it. Here’s what you can do:
- Emergency fund: Build a substantial emergency fund to cover mortgage payments during tough times.
- Have a mortgage you can afford: Ensure your mortgage is affordable, even in worse-case scenarios.
- Maintain a solid credit sore: Maintain a strong credit score for better refinancing options.
- Diversify your investments: Don’t rely solely on real estate; diversify your investments to mitigate risks.
Final Take
Buying a house right before a housing market crash can undoubtedly be challenging and stressful. Real estate markets have cycles, and downturns are usually followed by recovery periods. However, with a long-term perspective, a mortgage that’s manageable and a solid financial strategy, you can still come out on top.
Being informed, cautious and prepared are your best defenses against the uncertainties of a housing market crash. Remember, a home is not just a financial investment, but a place where life happens and memories are made, and that value is immeasurable.
FAQ
- Will housing be cheaper if the market crashes?
- Yes, house prices typically decrease during a real estate housing market crash, making them more affordable in general. However, the overall affordability still hinges on your personal financial situation. It's important to consider factors like your own finances, your job stability, your creditworthiness and ability to get a loan, as these can be affected in a market downturn, influencing your ability to purchase, even at lower prices.
- Should I wait for the market to crash to buy a house?
- Waiting for a market crash to buy a house is risky. Market timing is unpredictable, and you may miss out on homes while waiting. Loans may be harder to get, especially if the crash comes with a recession. It's better to focus on your financial readiness and the current housing market, rather than trying to time a potential crash.
- Is it better to have cash or property in a recession?
- In a recession, it's usually better to have cash. Cash gives you quick access to money when you need it. Property values can go down and it can take time to sell houses. But, owning property can be good for the long run, as prices often go up again after a recession. Having both cash and some property is a smart way to balance your risks during tough economic times.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
