Over the past few years, we’ve seen a lot of ups and downs in the real estate market. However, after two years of continual price increases, housing affordability may finally be in sight. A housing market correction in 2023 may indicate some benefits and challenges for investors. Here’s what you need to know about a housing market correction and how to invest during volatile times.
Contents of This Article:
- What is a Housing Market Correction?
- Will There Be a Correction in 2023?
- Signs of a Housing Market Correction
- Housing Market Correction vs. Market Crash
- How Investors Can Navigate a Market Correction in 2023
- Improve Your ROI With Property Management
What is a Housing Market Correction?
Whether you’re an investor, landlord, or property management company in Baltimore, it’s crucial to stay up-to-date with market changes. After two years of inflation and high real estate prices, many investors wonder if a correction will happen in 2023.
A housing market correction happens when real estate prices drop below their market peak. Generally, a correction occurs after a significant increase in home values over a period of time. Before a correction, demand for real estate drops significantly. However, during a correction, demand for properties rises again.
Buying real estate during long periods of inflation can be challenging. As such, if you’re looking to invest in real estate this year, you may want to look for signs of a correction.
Will There Be a Correction in 2023?
It’s hard to say whether we’re in a correction or if there’s one on the horizon. Housing market corrections are common after extended periods of inflation. According to some experts, a correction started in late 2022. On the other hand, some say that a correction is coming in 2023.
Ultimately, it depends on which markets you’re looking at. Each location and property type are affected differently, so the question can be tricky to answer. However, there are a few clear signs to look for that may indicate a housing market correction. We’ll look at these signs next.
Signs of a Housing Market Correction
There are a few clear signs that indicate a housing market correction. However, it can take time to decipher the differences between a correction and a crash. That said, here are some clear indications of a correction, some of which can indicate a crash. Later, we’ll go over the differences between the two market scenarios.
- Home Sales Fall
- Inventory Grows
- Sellers Drop Prices
Home Sales Fall
One of the largest signs of a market correction is falling home sales. Real estate prices can fall due to inflated prices, high mortgage rates, and economic unpredictability. Generally, fewer home sales indicate that many prospective buyers have already bought a home or they can’t afford to. Another reason for the decline in home sales may be due to high mortgage rates, making it difficult to buy affordable real estate.
Inventory Grows
Another indication of a housing market correction is an increase in real estate listed for sale. A rise in inventory could indicate that many buyers or investors slowed down or stopped purchasing real estate. There could be a number of reasons for this, including higher home prices, inflated living costs, and high-interest rates.
Sellers Drop Prices
To keep up with competition and lack of demand, many sellers are forced to lower their listing prices during a housing market correction. Before a correction, during peak inflation, sellers can list their homes for extremely high prices. However, when the market levels out during a correction, people are going to look for more affordable real estate to purchase.
Housing Market Correction vs. Market Crash
It’s important to recognize that a housing market correction and a housing market crash are two different scenarios. In a market crash, home prices decrease dramatically, generally by 20% or more from their peak. However, in a market correction, home prices gradually decrease, usually by 10% or less from their peak.
While market crashes can result in negative imbalances in the real estate inventory, prices, and demand. Additionally, it leaves many homeowners paying more for their mortgage balance than their home is worth.
However, market corrections can be a healthy reset for inflated markets. Instead of dramatic imbalances, corrections result in more stable prices and leveled out supply and demand. As a result, a correction could bring prices down enough for prospective homebuyers or investors to finally purchase real estate.
How Investors Can Navigate a Market Correction in 2023
Whether you believe the predictions for a potential housing market correction or not, it’s essential to learn how to navigate a volatile market. As such, here are a few ways investors can focus on building their portfolios throughout the following year.
- Research the Market
- Monitor Cash Flow
- Add to Your Portfolio
- Use Less Leverage
Research the Market
The first step to navigating changes in the real estate market is research. If you’re looking to invest, you’ll want to know whether real estate prices are high, low, or stable. Additionally, looking at different locations while analyzing real estate markets is important. For example, you’ll want to find low-risk areas with low vacancy rates, population growth, and economic growth.
Monitor Cash Flow
Current investors should monitor their rentals to see how they’re performing now and how they’ve done in the past. In addition, it’s important to look at your cash flow instead of future appreciation to invest during a market correction. After all, your property may temporarily decrease in value, but that doesn’t necessarily mean your rental income will follow suit.
Add to Your Portfolio
In a housing market correction, real estate prices drop. As such, it’s a great time for investors to add to their portfolios and increase rental income. However, if you’re worried about future appreciation, you may want to buy properties with room for improvement. That way, you can buy them at low prices and fix them up to increase their value.
Use Less Leverage
During a housing market correction or crash, you may be tempted to over-leverage yourself with a high loan-to-value ratio (LTV). However, you can lower your risk by borrowing less money instead of taking out the maximum loan amount. For instance, instead of maxing out at 80-90%, consider funding around 65-75% of your investment with a loan.
Another strategy to lower your risk is to completely pay off one of your mortgages, giving you more cash flow and fewer expenses for one of your properties.
Improve Your ROI With Property Management
A housing market correction can result in some benefits and disadvantages for investors this year. While rent prices may decrease, it can give investors more opportunities to buy more properties and increase rental income. However, it’s important to put property management first to minimize the risk of investing during a volatile time.
Need More Advice? contact us today!
If you’re looking for a top-notch management company, Bay Property Management Group can help. Our team of qualified professionals can help you achieve the best returns on your investment properties. Whether you need assistance marketing properties, screening new tenants, or performing inspections, BMG can help! Contact us to learn more about our services and connect with a property manager today.
