CNBC once released a public news report calling home ownership an “escalator to wealth.”
That’s probably an overstatement.
It’s true that home ownership has outperformed inflation for the last 100 years. But sadly, your equity can quickly turn sour unless you’re prepared to deal with the common side effects that a recession brings.
Thankfully, there are a few tips that you can learn which will give you an edge when bad times hit.
Housing Prices Drop First
The idea that you can monitor the economy and sell your house before a recession hits is probably wishful thinking.
In fact, research clearly shows that housing prices are more likely to drop before a recession hits, not after. This means your home has probably already lost a big chunk of its value by the time you notice you’re in a recession!
Hopefully, this simple fact will help you time the market correctly.
More People Rent
The 2008 financial crash was one of the most catastrophic real estate collapses in U.S. history.
However, not all real estate was negatively impacted. Data shows that the 2008 crash may have actually benefited the owners of rental properties.
Estimates show that a whopping 5% of the U.S. population switched from being homeowners to being renters during this time. The number of renters in the country increased 43.3% from 38.5%, according to Business Insider.
The more people can’t afford their mortgage, the more they will start renting instead.
Rent Prices Go Up
According to that same Business Insider report, after 2008, landlords also saw rent prices surge during the recession:
“Not only are the percentage of renters increasing, so are the rents – which have risen faster than incomes. Average rents in the top 50 markets have risen 22.3%, while incomes nationally fell 5.8% in the nine years since 2006.”
It’s basic supply and demand. The more renters there are, the more rental property is worth.
Private Financing Is Golden
Banks are always bigger than you and they will crush you if required.
The only workaround? Private financing with someone you have leverage with.
Especially if you can create a custom agreement. Creative finance can be very useful in bad times.
You don’t want to be in a situation where you’re trying to negotiate with a bank, because you’ll get the short end of the stick every time.
Banks are too big to react to market downturns by examining every potential deal closely enough. You’re probably better off with private financing working with a businessman or small-time home buyer.
What To Remember
Just because these rules work most of the time doesn’t mean they’ll always work.
That’s the double edge sword which is economics. You can’t predict anything. You can only prepare yourself to a certain limit.
But don’t let that stop you. Do what makes sense at the time and have an exit strategy if you get it wrong.
