You may have heard the term bear market in the context of buying stocks. During a bear market, stock values fall 20% from a recent high. Some bear markets are short-lived (like the bear market that hit in early 2020 on the heels of the COVID-19 outbreak), while some can last longer.
Similarly, when the housing market crashes, property values can fall 20% as well -- or drop substantially. So it's important to gear up for that possibility, whether you're a regular homeowner or a real estate investor.
Are we headed for a real estate bear market?
To be clear, right now, we're not in a bear market -- not in the context of stocks, and certainly not in the context of real estate. In fact, home prices remain quite elevated, as they've been for well over a year.
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In February 2022, the median existing home sale price rose to $357,300, per the National Association of Realtors (NAR). That represents a 15% uptick from one year prior.
As of this writing, the NAR doesn't have comparable data for March. But based on market activity, there's no reason to expect a major plunge in median home sale prices for the month.
But while home values may be strong at present, things could change in the course of the next year, for a couple of reasons. First, home values are so high on a national level they're practically unsustainable. Secondly, mortgage rates have risen sharply over the past few months, so borrowing is more expensive than it's been in years. That's apt to cause a gradual decline in buyer demand.
If mortgage rates keep soaring, though, which could happen, buyers might pull out of the market at a more rapid pace. That could lead to a situation where home prices start to come down rapidly.
How to prepare for a real estate bear market
There's a good chance we won't experience a widespread housing market crash this year, or even next year. Rather, what's more likely to happen is that home prices gradually dip back down to more moderate levels as buyers rethink their plans.
A big reason home prices are unlikely to crash is that inventory remains low. And so while buyer demand might decline, it shouldn't disappear.
But it's a good idea to prepare for a real estate bear market just in case. If you're a regular homeowner, that means making sure you can comfortably swing your monthly mortgage payments. If you're in over your head, you may want to consider selling now, while you're still likely to command a higher sale price, and moving to a more affordable home.
If you're a real estate investor with income properties in your portfolio, assess their performance. If you've had no problem getting those homes rented out, then you may not want or need to do anything. Otherwise, the same advice applies: Now may be a good time to unload a property that's underperforming.
While there are no signs pointing to a near-term housing market crash, sometimes, negative events can take us by surprise –- just as stock values could sink without much warning. And so it's a good idea to be prepared for those scenarios, even if they don't actually come to be.
