What happens when the housing market crashes?
Notice the question is when not if.
The when-not-if declaration is one of the most valuable tidbits I learned between cycles.
I listened intently as a 90-year-old gentleman explained that corrections were certainty; speaking from his wisdom of enduring (and prospering1) from 7 full real estate downturns.
A housing market crash is as inevitable as an outbound tide although some lunar tides reach higher or retreat further. This feels like a lunar tide to me.
If this analogy sounds strange to you perhaps you didn’t have an interactive experience with the last real-estate downturn, or you were too young to empathize with any heartache from the conversations swirling around. Or you came to believe that the bubble burst only because of subprime lending.
As predictable as an outbound tide is, it’s also healthy. Without it, life breaks down. The littoral zone of the boundary of the ocean receives a rich dose of oxygen during the salient retreat. PH, minerals, and nutrients are recharged. The water-top insulation is peeled back allowing gestation to begin.
In real estate and housing, the cycle is also necessary and healthy.
Greed and unwholesome motives get checked. Extremes get averaged. Normalcy takes a foothold. Answers become exposed.
Buying opportunities present to those who were patient.
The baton gets passed to a younger generation coming along that represents the future.
But who gets injured in a downturn of any magnitude? Don’t foreclosures increase?
Yes, in any traffic pattern – there will be crashes and injuries. I liken the real estate cycle to a round trip commute where a single day’s commute equates into a decade-long orbit (an appx full real estate cycle).
When is an accident in commuting more likely to occur?
Someone is trying to cut the line (get rich quick)
We’ve all seen the driver illegally (any hyper dangerously) using the breakdown lane for his advantage.
Perhaps that driver IS having a true emergency (godspeed!) or maybe that driver’s emergency is simply oversleeping their alarm because they were partying the prior night. That lack of planning or foresight contributes greatly to someone else’s risk of injury and death.
Texting and driving (acting on impulsivity)
Impulsivity (acting without a plan) can be equated to how some people approach the buy-cycle …. someone attempting to “get into flipping” is similar to how shares are traded on Robinhood.
Impairment (poor decisions)
In real estate, these poor decisions are often someone else’s ideas. FOMO kicks in, and next thing you are the owner of (pick one): a timeshare, a seasonal camp, a multifamily in a county you’ve never been to, a Maine home on a lake that’s water is entirely covered with lily pads, cute home in a town with no downtown and as it turns out no fire department or gas station either.
All of these factors can be talked about before a driver earns a license …. or in real estate, before you make your purchase (Read our article HERE about Proactive vs Reactive home buying).
What about job loss and illness as it relates to foreclosure?
Both of these involuntary actions can, and do, occur in all tidal cycles (surging markets and gut-wrenching downturns).
Job loss and illness phenomenon’s present in all stages of a real estate cycle just like a medical emergency can occur to a driver in any traffic pattern (although heart attacks are more common in the stress-filled morning commute).
My recommendation on avoiding the risks that a downturn represents are:
- Buy a home or investment property only when you are on stable ground.
This includes your day job – how confident are you in your employer’s ability to handle a storm?
If you are buying with a partner, how simpatico are you with that person? If it’s your college roommate and they take a tech job in CA, how will you handle the property maintenance?
- Real estate is not liquid.
You need to wait for a buyer and despite the stories, buyers aren’t always eager.
The administrative trading fees on real estate are well into 5 figures.
If you don’t have backup (reserve) money and you hit a speed-bump forcing you to sell – you will probably get wrecked. Make sure you have enough savings to prevent the need to sell when you weren’t planning to do so.
- Create a game plan.
Don’t buy impulsively or try to make a quick hit. Sure, some folks will get lucky in cryptocurrency and others in real estate, but to even out those odds you’d want to have a game plan. A home buying plan should be with a long horizon. An investment plan should define your competitive advantage and how you will handle the possibility of a loss in value or decreased rental income (both apt to present at the same time).
- Watch how those ahead of you have done it.
While the rules may not always be an exact template, many success stories can echo basic principles: Non-emotional transacting, following a written plan, patience, good council, long term thinking, being cognizant that we are always in a cycle and applying deferred gratification for a larger return.
- Welcome the changing tide.
If you’re already an active investor, save some dry powder for dollar-cost averaging on the “backside of the wave”. If you’re a homeowner, consider investing in your existing home instead of moving or upsizing as one way to reduce your risk. Consider investing in energy efficiencies and capitalize on low-interest rates.
While my losses in 2008 pushed my expected retirement date back by a decade (I needed to liquidate my retirement account to settle the shortage on a real estate investment) I state with full honesty, while I wouldn’t want to go through that struggle again, I also wouldn’t want to NOT have gone through it.
The IP that was free for the taking on that journey has made me a better guide in my industry. I am daily freely helping those who are interested in learning. This has provided 100x the value of my personal loss to folks that I am gifted to work with. And since I enjoy my work so much and don’t consider it “work” I’m really not working any longer, am I?
With gratitude,
John Donlon
1His Boston-based rental portfolio tops 20,000 units.