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Concerned with the market? 11 Investment Strategies for a Housing Correction

Saturday, October 22, 2022   /   by Laura Larson

Concerned with the market? 11 Investment Strategies for a Housing Correction

Housing prices have been corrected. Although some tendencies are starting to emerge, it is yet unclear what this will entail for home market prices across the country. These tendencies provide us with crucial information that will enable us all to manage the house-pricing correction and make profitable investments.

The US Housing Market has reached its peak.
The national market has most likely reached its absolute highest price point. Simply said, most markets reached their all-time highs in June and have subsequently started to decline month after month. The housing market is cyclical, with prices often reaching their high in the summer before beginning to fall. But in our view, reaching a peak in June is rather premature and signals the start of a decline.

Due to this seasonality, the housing market is sometimes examined in terms of year-over-year comparisons (i.e., what transpired in August 2022 compared to August 2021). Of course, everyone is interested in finding out if the national housing market will decline year over year, but the truth is that we have no idea. 
We don't know where the housing market will be by the end of 2022. The national housing market will either have very low growth rates or somewhat negative growth rates. In August, San Francisco and San Jose, California, became the first two markets to report year-over-year reductions. 2023 is still too far away to predict at this time.

Individual Markets Are Where the Real Story Is
The most crucial information about the housing market is the disparity between markets. Some markets still appear to be strong seller's markets while others have experienced a sharp shift toward a buyer's market.

Inventory and days on market are two lead indicators for house prices that we like to use. When one or both of these indicators is low, a seller's market is present. When they are high, we are seeing a buyer's market.

11 Investment Strategies for the Housing Correction
So how do you invest in this kind of market becomes the question? Here are some of my opinions:

1. Spend money on hybrid cities
Ideally, locations with a respectable cash flow, current pricing stability, and respectable long-term potential. Smaller communities like Gainesville, Haymarket, Bristow or Warrenton, Virginia might fall under this category.

2. Negotiate with sellers
Negotiate! Look for off-market transactions if you wish to invest in markets with promising long-term potential. When prices begin to fall, sellers occasionally panic, and you might be able to find bargains. Although the numbers may not support this, most seasoned investors believe that sellers are currently open to negotiation. It's more crucial than ever in this kind of market to work with an investor-friendly agent who can guide you through the nuances of the local market.

3. House hack
I believe that house hacking is almost always a wise choice.

4. Stay away from flipping
Stop flipping houses right now. I'm biased because we don't flip properties, but I wouldn't suggest anyone start now. There are three types of risk: market, labor, and material cost. It's likely still profitable for seasoned players, but I don't believe it's a good moment for newcomers to begin flipping.

5. New construction could be profitable.
For long-term investors, newly built homes may offer a comparatively good bargain because their prices are projected to decline more than those of existing homes. Although new construction isn't often a fantastic option for rental property investors, I'm keeping an eye on recently built homes that are distinctive and in attractive regions because many developers are offering incentives and discounts.

6. Beware of short-term rentals
The markets for expensive holiday rentals, in my opinion, will be severely damaged. The need for second houses increased dramatically during the epidemic, coupled with investor interest in short-term rentals. I worry that some STR investors bought at a bad moment, and if demand falls off during a recession, there could be some forced selling. That demand (not prices) has come crashing back down to earth. I never want somebody to lose money on a house they bought or an investment, but if that does happen, it might create possibilities for purchases.

7. Find innovative finance methods
Subject To financing means a buyer essentially takes over the seller's remaining mortgage balance without making it official with the lender. It's a popular strategy among real estate investors. These financing options can increase your purchasing power and provide the chance to purchase real estate at rates below those of traditional mortgages.

8. Keep what you have.
Keep cool and continue on if you purchased real estate during the last ten years with low-interest debt. The recent value may be lost, but if your property generates cash flow, rent growth is enhancing your cash flow and may do so in the future, making it a sound long-term investment. Even though it may seem uninteresting, in the current market it makes sense to hold onto a property that generates cash flow, has a low rate, and has the potential for rising revenue. Alternatives like a cash-out refinance, a 1031 exchange, or selling and paying taxes will probably result in lower returns than simply staying put.

9. When possible, use cash.
If possible, think about making a cash-only purchase. Debt has a high cost, as we all know. In the short term, investing in real estate with high-interest debt may actually reduce your returns compared to buying in all cash if you believe the consensus that a price increase is anticipated to come in between 3% and -8% next year. If you purchase an income-producing property at a 4% cap rate and predict a 2% increase the following year, then debt with an interest rate of 6-7% will probably result in worse returns than if you paid cash.

10. Make money lending privately
It could be a good idea to switch at least some of your real estate strategy to the lending side if rates continue to rise. The current market allows for returns on private lending as high as 10–14%, and the demand for private loans is expected to increase dramatically in the upcoming months. As a lender, the worst-case scenario is that you end up owning a portion of the real estate you are lending to. If correctly planned and implemented, lending might offer over the next 12 months far better returns than stock investments with significantly lower risk.

11. If you have a crystal ball, time the market.
Focus on the fundamentals and search for worthwhile long-term prospects. Keep in mind that investing in rental properties is not the only strategy to profit from property values. You could try to time the market, but you'll lose out on cash flow, debt payoffs, and tax advantages in the interim. I'm not saying you should buy anything, but when considering how to invest your capital, you need to consider factors other than property prices.

All of this advice is based on my current assessment of the market, so if you believe my assessment is inaccurate, you might want to think about other options. It's incredibly challenging to predict the future given the current state of the economy, but I hope this analysis will make it easier for you to understand what is happening and how to make investments in the market.