Why are so many people predicting a property price crash in 2024?
There are varying opinions on whether or not a property price crash will occur in 2023 or 2024. As we enter the final financial quarter of 2023, our minds now turn to the next year and wonder what's in store for what is, for most people, their most significant investment.
Experts are predicting the housing market will cool down in the coming months. This is attributed to rising mortgage rates and inflation, making buying a home more expensive.
After researching the causes of the 2008 crash, the topic of an upcoming impact is primarily exaggerated on mainstream social media.
Let's first take a look at the last big real estate crash in 2008
The real estate crash in 2008 happened because of a combination of factors, including the subprime mortgage crisis, high debt levels, and a lack of regulation in the financial sector.
Subprime mortgage crisis:
Starting in 1999, the subprime mortgage market experienced a significant increase in growth. This allowed individuals with low credit scores and a higher risk of defaulting on loans to take out adjustable-rate mortgages with low starting rates that would eventually increase after a few years. As a result, there was a surge in demand for housing due to the lower interest rates that made it easier for borrowers to obtain mortgages.
What was the subprime mortgage crisis?
There were multiple reasons for the crisis, such as an increase in private sector funds, banks participating in the mortgage bond market, government policies promoting homeownership, speculation among home buyers, and predatory lending practices by some mortgage lenders. One specific example of predatory lending was the adjustable-rate mortgage, known as the 2-28 loan, which was sold by lenders directly or indirectly through mortgage brokers. The percentage of subprime mortgages grew from $35 billion, or 5% of total originations, in 1994 to $600 billion, or 20%, in 2006.
The subprime meltdown drastically impacted the U.S. housing market and overall economy, lowering construction, reducing wealth and consumer spending, and decreasing the ability for financial institutions and investors holding MBS and CDOs to hold trillions of dollars worth of near-worthless investments.
The following economic factors contributed to the crash:
High levels of debt:
Many homeowners took on high debt levels to purchase homes they could not afford, leading to a housing bubble.
Lack of regulation in the financial sector:
The financial sector's lack of regulation enabled unregulated markets and predatory private mortgage lending.
Rapidly rising home prices:
Rising home prices have created a sense of urgency among buyers and investors.
Exotic loans:
Exotic loans that required little documentation or featured variable interest rates helped people buy homes they didn't have the income to afford.
Defaulting on loans:
Homeowners with subprime loans defaulted due to payment inability.
The 2008 housing market crash had a severe and long-lasting impact on housing prices, which took several years to recover. Even today, many areas have not returned to their pre-crash levels. As a result of the crash, there has been a significant shift in the housing market, with more Americans choosing to rent rather than buy homes.
Back to the present
According to Zelman, a housing analyst who correctly predicted the 2008 crash, U.S. home prices are expected to decrease by 4% in 2023 and an additional 5% in 2024. On the other hand, Goldman Sachs predicts an increase of 1.8% in 2023 and 3.5% in 2024.
Although the U.S. housing market is anticipated to experience slower price growth in the next five years, experts do not foresee a crash similar to the one in 2008.
It is significant to note that the housing market has a crucial effect on the U.S. economy. Predicting its future trends is essential, as external factors can influence it.
So now let's look at the factors contributing to the predicted property price crash in 2023-2024
Several factors contribute to the predicted property price crash in 2023-2024.
Rising Mortgage Rates
With rising mortgage rates, buying a home will become more expensive.
Lack of Affordable Real Estate
Access to affordable housing is a significant obstacle for many people entering the housing market.
The COVID-19 Pandemic
The COVID-19 pandemic has also contributed to the decline in the housing market.
It has led to a decrease in demand for housing.
An increased supply of houses
Additionally, an increase in the supply of homes is expected to contribute to the predicted slowdown in the housing market.
It is expected that more homeowners who were hesitant to sell during the pandemic will put their homes up for sale in the upcoming years, resulting in an increased inventory of homes for sale.
Experts predict that the housing market will slow down in price growth over the next five years, making a 2008-style crash unlikely.
How can investors take advantage of a property price crash if it happens in 2024?
Investors can take advantage of a property price crash in several ways, including:
Buying low:
When there is a property price crash, the value of homes goes down, and sellers might be more willing to negotiate on the price or offer benefits to buyers. Investors can purchase properties at a discounted rate during a buyer's market.
Increasing their portfolio:
Investors with a sizable portfolio should consider selling some assets to increase their bankroll. This will allow them to take advantage of the lower prices and acquire more properties.
Short-term investments:
Short-term investors with market-ready properties are in a good position. They can exploit the reduced prices and sell the properties for a profit once the market recovers.
Tax benefits:
During a period of post-crash inflation, owning property can provide tax benefits. Investment properties can earn tax breaks through depreciation, and investors can use the 1031 exchange loophole to avoid capital gains when making money on a sale before moving on to a new investment property.
What is the 1031 exchange loophole?
A 1031 exchange is a legitimate tax benefit available to real estate investors. It allows them to exchange one investment property for another and defer paying capital gains taxes as long as they adhere to the rules set by the IRS. This is not a tax loophole or evasion tactic but rather a way to help boost the economy. The term "1031 exchange" originates from Section 1031 of the Internal Revenue Code.
Here are some key things to know about 1031 exchanges:
Are you familiar with a 1031 exchange? This tax break allows you to defer capital gains tax by reinvesting the proceeds from selling a business or investment property into a new property for the same purpose. However, a third party must hold the proceeds in escrow, which cannot be received temporarily. It's important to note that this process can be complex, and mistakes can lead to significant costs.
Consider working with a reputable, full-service intermediary to ensure a smooth transaction.
It's also worth noting that a 1031 exchange is only available for investment or business property, not personal homes.
The total value of the replacement candidates must be at most 200% of the original property you sold.
The exchange should be completed within 180 days to qualify for a 100% tax deferment. In summary, a 1031 exchange enables real-estate investors to put off paying capital gains taxes by exchanging one investment property for another. Still, it is subject to strict IRS rules and can be a complex process.
Enlisting the help of an experienced local real estate agent:
If you're considering buying during an economic downturn, enlist a professional local real estate agent. Not only do agents know their markets well, but they also know how to get you the best deal in any situation, including a recession.
It is important to note that while a property price crash presents opportunities for investors, it is not without risks. Investors should be prepared for such unfortunate circumstances while they are not yet happening and take steps to safeguard their investments and finances.
What are some strategies for finding good deals on properties during a crash?
Here are some strategies for finding good deals on properties during a property price crash:
- Be prepared: Have your financing and resources in line before looking for properties. This will give you an advantage when making an offer, as you can move quickly.
- Do your homework: Research the market and the properties you are interested in. Look for properties that have been on the market for a long time, as these sellers may be more motivated to sell and willing to negotiate on price.
- Look for motivated sellers: During a property price crash, some sellers may be more motivated to sell their properties quickly. Look for properties that have been on the market for a long time or recently reduced in price.
- Negotiate: Be prepared to negotiate with real estate agents and sellers. Avoid bidding wars and walk away from inadequate deals.
- Consider seeking assistance from a knowledgeable real estate agent in your area. A real estate agent can help you navigate the market and identify lucrative property opportunities. They can also help you negotiate with sellers and avoid common pitfalls.
- Please stick to your budget: During a property price crash, it can be tempting to overspend on a property that seems like a good deal. It is crucial to adhere to your budget and refrain from accumulating excessive debt.
By following these strategies, investors can take advantage of a property price crash and find good deals on properties.
However, it's important to remember that real estate always carries some risk, and investors should be prepared for potential challenges.
What are some common mistakes to avoid when buying property during a recession?
Here are some common mistakes to avoid when purchasing property during a recession:
- Overpaying: During a recession, property prices may be lower, but avoiding overpaying for a property is essential. Do your research and negotiate with the seller to get the best deal possible.
- Not being prepared: Have your financing and resources in line before looking for properties. This will give you an advantage when making an offer, as you can move quickly.
- Not considering the long-term: While it may be tempting to buy at a low price during a recession, it's essential to consider the long-term implications of your purchase. Make sure the property is a good investment that will appreciate over time.
- Working with an inexperienced real estate agent: An unprofessional real estate agent can make navigating the market and finding good deals on properties difficult. They can also help you negotiate with sellers and avoid common pitfalls.
- Not having a contingency plan: During a recession, it's crucial to have a contingency plan in case your financial situation changes. Ensure you have enough savings to cover your mortgage payments and other expenses in an emergency.
Buyers can capitalize on a recession by avoiding common mistakes and finding great deals on properties.
However, it's important to remember that investing in real estate always carries some risk, and buyers should be prepared for any potential challenges.
In conclusion
There are varying opinions on whether a property price crash will occur in 2023 or 2024. Factors contributing to the predicted boom include rising mortgage rates, lack of affordable housing, the impact of the COVID-19 pandemic, and an expected increased supply of houses.
However, experts do not expect a crash similar to the one seen in 2008. Investors can take advantage of a property price crash by buying low, increasing their portfolio, making short-term investments, and utilizing tax benefits.
Strategies for finding good deals during a crash include being prepared, doing thorough research, looking for motivated sellers, negotiating, and enlisting the help of an experienced real estate agent.
Common mistakes to avoid when buying property during a recession include overpaying, not being prepared, not considering the long-term, not working with an experienced agent, and needing a contingency plan.
