For realtors and investors, planning ahead is one of those things that separates winners from losers. While odds are that we won’t witness a housing market crash in 2022, what would you do if it did happen?
This article is a sort of fear-setting or worst-case-scenario approach to real estate market predictions. What 2020 clearly showed us is that it’s usually hard to predict the ebbs and flows of real estate. No one could have thought there would be an influx of millennial first-time homebuyers pouncing on homes while the coronavirus vaccine was still in view. Real estate activity in 2020 had a significant effect on the U.S. economy’s rebound. So, I asked some real estate experts the question: If the housing market crashes in 2022, how would you keep your business afloat? Here are the responses I received.
Jeb Smith, Broker Associate and GRI with Coldwell Banker Realty in Huntington Beach
“I want to be clear that I don’t believe there will be a ‘housing market crash’ in 2022, but if the market were to change, I would do exactly what I’ve done my entire career, and that’s focus on relationships. As a realtor who receives the majority of his business from past clients, friends, and family, I would continue to nurture those relationships and be a source of information to help guide them through the tough times ahead.
“At the same time, I have experience in selling foreclosures in the last housing debacle and would work on redeveloping those relationships to take advantage of any new opportunities that could arise. I don’t believe you need to change your business model entirely if you’ve been focused on the right things the whole time, so I would just continue to focus on those people that know me, like me, and trust me, and things will be just fine.”
Ken McElroy, Real Estate Analyst and Investor
According to Ken, there are four main opportunities for investors right now in the housing market:
1. Cost to Build vs. Cost to Buy
“Let me give you an example: Right now we are in the process of buying a property in Katy, Texas. We’re buying two apartment complexes of 648 units in Katy and paying $73 million for both projects. That’s under $130,000 per unit, which equates to $120–$130 per foot. So, I’m buying a property at well below the cost to build. If I was to build another property right next door to that property, it would be well over $200 per foot. In Phoenix, that same exact property we bought in Katy, Texas will cost a little over $200,000 a unit. And of course, we went down to Katy because the rents are not that much different because the property is right across the street from the Texas Medical Center.”
In other words, give more weight to locations where buying real estate is comparatively cheaper than building — employ considerable due diligence.
2. Supply vs. Demand
“Take a look at the supply — where are people going? What’s the occupancy? If occupancy is really high in an area or about ready to be high because the area is growing, then that means that your rental demand is going to be there, and rents will grow like we just saw for the last 10 years in Austin, Texas.”
3. Follow the People
“People vote with their pocketbooks and their feet — the rider trucks, the U-Hauls, etc. Florida, Texas, and Arizona are good markets right now. But it’s very hard to buy properties in many places because people are moving there right now. And you’re going to see rental rates go up in these places because people are buying properties for investment and renting them for the long term.”
4. Cash Flow vs. Capital Gain
“Don’t buy properties for capital gains. This is not the time, for example, to buy a house for $300K and flip it for $400K. You want to make it cash flow. You want to use the strong rental rates so that whatever you buy will put cash in your pocket over the long term and you’re building a primarily tax-free passive income.”
Kristina Morales, Realtor, KristinaMorales.com
“Regardless of the condition of the housing market, I am confident that my business will stay afloat. The market is currently hot. However, it is hot for sellers, not buyers. So, when it shifts to a buyer’s market, it will be a hot market for buyers.
“For me, there are a few key things that I plan on doing to position my business for sustainable success. The first key to my business is to continue to invest in the right places — systems, automation, marketing, and people.
“Another key is anticipating market shifts and being nimble enough to skill up and prepare for the new market conditions. For example, if we find ourselves in a market where short sales become prevalent, then I will be sure to prepare myself for this environment.
“The last key is to continually innovate. The client experience is the number-one driving force in my success, and constantly trying to innovate to improve and deliver value to my clients is essential.”
Bill Gassett, Realtor and Owner of Maximum Real Estate Exposure
“When markets correct themselves, it is important for agents to be ready to adjust. It is very difficult to go from having to do little work to sell a house to all of a sudden having very few people to work with. In the last significant real estate downturn from 2007 to 2012, there were significant hardships. Numerous homeowners lost substantial equity in their homes. The economy was awful, and people were losing their jobs.
“This led to many financial hardships including foreclosure. As an agent, I began to notice fairly quickly there was a demand for someone who could help homeowners short sell their property rather than letting it go to foreclosure. To keep my business running full steam ahead, I became a short-sale expert.
“While other agents were floundering, my business skyrocketed. Doing short sales in addition to my traditional business, I was doing 80–100 transaction sides by myself. Needless to say, these were some of the best-earning years of my career.
“All great real estate agents need to be able to adjust to their environment. Whether that means learning something new, investing more money back into their business, or doing something different. Change is inevitable. A real estate correction will happen again. It always does. Agents who can recognize this early on will be able to put themselves in a better position not to skip a beat.”
Marina Vaamonde, Real Estate Investor, HouseCashin.com
“Experienced housing investors realize that the economy works in cycles and that they have to prepare for slow times. In tough times, cash is definitely king. Investors who recently got into the market have probably not had time to set aside reserves. Even some experienced investors ignore the need for adequate reserves. They had better start now.
“High prices make this a good time to sell properties that you previously bought at lower prices and have held onto. Investors with a sizable portfolio should consider selling some assets to increase their bankroll. Short-term investors with properties that are market-ready are in a good position. If the rapid acceleration of housing prices results in a crash, there will be opportunities for those who have cash to spend.
“Decreased demand will probably not last long. There was already a housing shortage prior to the pandemic. According to Freddie Mac, the U.S. had a housing shortage in 2018 of 2.5 million units. With the right preparation now, a housing investor will still be in business if the housing market declines.”
Aleksandr Pritsker, Realtor and Founder of Team Blackstar at eXp Realty
“Realistically speaking, if there’s a market crash, that means investors will start coming in and buying up everything as per previous market crashes. I always make sure to keep my business on a steady diet of all types of buyers and sellers, because you never know what type of market it will be. So, I try to make sure that I’m fully prepared for any market scenario and have the right contacts to be able to thrive and succeed in any market that may come up. You never know what tomorrow will bring, but you always have to surround yourself with the right business people to keep you going no matter what the situation is.”
Jordon Scrinko, Realtor, precondo.ca
“The great thing about real estate, in general, is that transactions occur regardless of price action. People have to buy and sell homes for a number of reasons — jobs, relocation, upsizing, downsizing, etc. My experience suggests that in a down market, sellers flock to the realtors who really know their market and produce results, rather than in a frothy market where any realtor will do the trick. Product knowledge is key in a down market.”
What is a housing market bubble?
When there’s limited supply and rising demand due to speculation or a deregulated real estate financing market, we have a housing bubble. It appears that currently, we’re in a housing bubble as home buyers overpay on homes in hot markets and investors compete with cash on overpriced homes. A housing bubble typically lasts for four to five years.
According to Wikipedia, “Bubbles in housing markets are more critical than stock market bubbles. Historically, equity price busts occur on average every 13 years, last for 2.5 years, and result in about 4 percent loss in GDP. Housing price busts are less frequent, but last nearly twice as long and lead to output losses that are twice as large (IMF World Economic Outlook, 2003).”
Eventually, price growth rises to a point where there isn’t a demand to sustain it, and it stagnates or falls — i.e., a sharp drop in prices or a housing bubble burst.
Will the housing market crash in 2022?
A recent Reuters poll of 40 housing analysts suggested that house values in the U.S. will rise more slowly in 2022. The surveyed analysts estimated that values would rise by 10.6% this year, followed by a gain of 5.6% in 2022. According to the Reuters report: “Beyond this year, U.S. house prices were forecast to moderate and average 5.6% growth next year and 4.0% in 2023.”
Experts believe we’ll see the high home price growth rates reduce to near-normal levels in 2022 and 2023. Another reason why there is probably not going to be a housing market crash in 2022 is that there have been tighter lending standards. A major reason for the 2007/2008 crash was that there was a high rate of mortgage fraud. The mortgage denial rate halved between 1997 and 2003. The cost of lending increased, and the federal reserve loosely supervised banks and lenders, leading to price corrections in many markets. The culmination of these things led to a housing bubble burst.
This led to hundreds of thousands of homes going into foreclosure, multiple subprime lenders declaring bankruptcy, and the real estate market requiring federal bailouts. Based on a survey of 5000 realtors by real estate MarTech platform Real Estate Bees, 56.6% of realtors don’t believe we’ll witness the same kind of foreclosure and short sale swamp that was witnessed in 2008. On the mortgage front, we don’t see the same kind of indiscriminate lending being practiced in the face of new legislation and federal oversight. Yet, there is still uncertainty, since “whatever goes up must come down.” But based on the facts, the housing market crash isn’t about to crash in 2022.
The key to navigating a housing market crash is having a good strategy in place. During the 2008 housing market crash, realtors and real estate investors who embraced innovative marketing strategies grew their businesses even while the overall market declined. While a housing market crash isn’t expected in 2022, it’s still a good idea to plan for every eventuality.
About the Author:
Agnes A Gaddis is a writer for Inman News, Influencive, and the TSAHC (Texas State Affordable Housing Corporation). She has over 7 years of experience writing for the real estate industry. Connect with her on Twitter: @Alanagaddis
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer advice on best places to invest in real estate or to buy or sell any securities or to make or consider any investment or course of action.