In investing, a bear market symbolizes a deep and sustained selloff in the market. Investors should be aware of the changing market cycles.
Table of Contents
- What Is a Bear Market?
- Bull vs. Bear Market: Where the Differences Lie
- What Does a Bear Market Mean in Real Estate?
- Are We in a Bear Market?
- Why Real Estate is the Best Investment in a Bear Market
- What Real Estate Investment Strategies Are Best in a Bear Market
- Conclusion
Investment markets are ever-changing and complex. In order to make informed decisions and build a solid investment strategy, you must know what to expect from each market cycle. For you, as a real estate investor, both bear and bull real estate markets will affect your portfolio.
Speculations abound that we’ll see a bear market 2022. But speculators may need to cool off because the real estate prices rose at a record pace in December 2021. And as long as there is an inventory shortage (buyer’s market) fueled by homebuyers wanting to get ahead of predicted rate increases, a bear market is unlikely to happen.
In this article, we’ll explain the nature of a bear market and what strategies work best for it.
What Is a Bear Market?
You’ve heard the terms but never really understood. What is a bear market and what kind of bears do they sometimes talk about? When it comes to investing (generally speaking), a bear market occurs due to a prolonged drop in investment prices. According to the bear market definition, the prices fall by 20% or more, and the bear market can happen in a market as a whole and for individual stocks.
Bear markets are symbolic of a sustained and deep market selloff, being considered an important indicator of investor pessimism and low confidence. During a bear market, investors often continue selling quickly despite any good news, which pushes the prices even lower.
The 20% decline is only the threshold, and bear markets typically drop much deeper (not all at once, but over a sustained period). Then, investors start looking for stocks with attractive pricing and begin to buy them, which is when the bear market ends.
The bear market sentiment may not affect the entire market if investors are bearish on a stock. However, when it turns to a bear market, almost all stocks within it go on a downwards path even if individually they report growing earnings and good news.
Stocks seem to be on a downward spiral nowadays because investors are worried about rising rates and high inflation, which may be leading to a recession. In addition to inflation, there are other things that add to the cloud of uncertainty. We refer to new COVID-19 lockdowns in China (which may disrupt the supply chain) and the war in Ukraine that trigger the higher commodity prices across the globe.
Examples of Bear Markets
Since 1900, we’ve seen about 33 bear markets, meaning that they are quite common and happen 3.6 years on average. Some of the most notable examples that stand by the bear market definition include the:
- Dot-com Bubble (2000-2002). A massive speculative bubble in technology stocks caused by the growing use of the Internet.
- Global Financial Crisis (2008-2009). The crisis that came as a result of a wave of subprime mortgage lending and their subsequent packaging into investable securities.
- COVID-19 Crash (2022). Due to economic shutdowns in most developed countries.
Bull vs. Bear Market: Where the Differences Lie
In the bull vs bear market clash, the two stand as each other’s opposites. A bull market is where prices of investments are on a sustained rise. It records generally favorable conditions of the economy, instilling faith in investors that the positive trends will stay strong in the months or years to come.
In contrast, a bear market exists only when the economy is receding and stocks are declining. Also, bear and bull are terms that denote how investors feel about the state of the economy and market. The bull thrusts his horns upward and charges forward while a bear slashes with claws downward.
So, if we were in a bull market right now, we would see stocks heading up by 20% or more from its recent lows. In other words, times are good if we are in a bull market. Bear markets typically last shorter than bull markets―the average length of a bull market after WWII is four and a half years. After the 2008 Global Financial Crisis and the following recession, we witnessed a bull market that lasted more than 11 years (until the COVID-19 outbreak).
What Does a Bear Market Mean in Real Estate?
Real estate is a large asset class and investment category that investors often turn to in a bear market. The stock price decrease rarely affects the real estate market directly. People need homes and companies need spaces to continue operating during a bear market.
So, what does a bear market in real estate mean and is it attractive to investors? For investors who want to stay active in the investment game, real estate investments jump at the forefront as the most viable option.
The housing market isn’t usually affected by changes in market sentiment as quickly as equities. That’s why they pose as an excellent opportunity to diversify and strengthen your portfolio. As for the rising interest rates, they can both hurt and help. They mean that the cost of borrowing is on the rise, but there’s real estate appreciation because of inflation. Ultimately, rising inflation and interest rates counterbalance each other.
According to current predictions, the US will get 13 million new rental properties by 2030, especially single-family units preferred by baby boomers and Millennials. The housing market will see sustained momentum in the following years.
Are We in a Bear Market?
Are we in a bear market and should I try to find some good property investments below their fair market value? Well, the signals of being in a bear market are quite clear. Since it occurs right before or after a recession, the signals are rising interest rates, inflation, wage growth, and hiring. It shows that the economy is slowing.
However, in the case of the coronavirus pandemic, when a bear market also occurred, the indicators were different. They include lockdown measures, spikes in unemployment claims, and widespread business closures.
Whenever investors notice that the economy is shrinking, they know that their profits will start declining in the near future. Therefore, they push the market lower by selling stocks. Compared to bull markets, bear markets are typically shorter and less statistically severe.
The real estate is not in a bear market, not in the context of both stocks and real estate. Housing prices actually continue to rise as they’ve been doing for over a year now. The possible bad things that could happen in the next few years would happen because of:
- High household values become so high (on the national level) that they become virtually unsustainable.
- A sharp rise in mortgage rates makes borrowing more expensive, which may cause buyers to pull out of the market.
However, there is a good chance that we won’t see a crash in the housing market this or next year. What’s more likely to happen is that property prices dip back down to more moderate levels. Buyer demand might only decline, but it should not disappear.
Why Real Estate Is the Best Investment in a Bear Market
During a bear market, real estate is an asset class that continues to produce profits. It’s true that the 2007 real estate market crash happened during a bear market, leaving investors with a bad taste in their mouths. But historically speaking, it’s a fact that real estate has always been a solid investment class for those who want to keep their money out in the market during a bear market.
Since 1952, there have been about 20 bear markets in the US and only those that happened in 2007 and 2009 did some damage to the housing industry. As for the other bear markets, the value of real estate increased in 18 of them. In other words, we’ve witnessed 90% of bear markets in the past 70 years, and the buy and hold real estate strategy has proven to be successful in most of them.
What Real Estate Investment Strategies Are Best in a Bear Market
When a bear market occurs, what should an investor do? The best thing to do is usually nothing because every bear market eventually ends. But what you do or don’t do in that period will affect your investment performance.
If you want to put your money to work while stocks are losing their value, there are still some things you can do. Here are some of the best investment strategies to resort to during a bear market.
● Don’t Overinvest
Resisting the temptation to overinvest is one of the most important aspects of your bear market investment strategy. It’s easy to pull all your money out from the stock market and buy all the real estate you can. It’s just a knee-jerk reaction, which is never good for an investor.
● Set Realistic Expectations
There are many reasons why you probably won’t see the value of your real estate investments grow during a bear market situation. You’re going to be disappointed if you think that you’ll see a rapid ROI after moving your money to the real estate sector. On the other hand, if you’re willing to invest in properties while tapering your expectations, you can earn some good money in a bear market. This leads us to our next point.
● Think Long Term
The average investor who reacts quickly is the one who underperforms in the long run. As we said earlier, the bear market doesn’t last long, and what follows after is a steady rise in investment prices. You already know that the main goal of investing is buying low and selling high.
When it comes to real estate, be sure not to react emotionally to mood swings but buy property you would like to own for the long run. Never sell them just because it’s a bear market and their prices went down. Even if you don’t see a significant rate of return, in the beginning, remember that your money will grow eventually.
Always remember that the primary goal of investing is buying low and selling high.
● Invest in Something You Could Rent
Bear market or not, people still travel and look for short-term and long-term accommodation. Even if the market value of your real estate investments is low, you can still generate a respectable return on investment by purchasing a good property in the right location. Such investments are called income-generating investments. They give you the ability to both earn a consistent income and avoid significant declines.
Be sure to do your due diligence and conduct a thorough real estate analysis for your potential investments. Determine their traditional and Airbnb monthly rental income, cap rate, occupancy rate, cash on cash return, and so on. All the said metrics are essential to calculating the potential ROI of each property.
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Microflipping
Microflipping is what we call digital real estate wholesaling. Based on real estate data that can be found online, microflipping stands as an efficient and fast way of buying and selling real estate. The best thing about it is that it doesn’t require large financial investments (outside of purchasing the investment property) or major renovations.
It’s called micro because investors don’t buy investment properties to hold them for long but rather sell them quickly or right away (if they’ve already lined up their buyers).
BRRRR Strategy
The BRRRR strategy term is an acronym for Buy, Rehab, Rent, Refinance, and Repeat. It is used by both beginner and experienced real estate investors to build a real estate portfolio in order to build a long-term passive income. And it doesn’t require substantial upfront capital.
The strategy involves:
- Acquiring the right properties under fair market value. They usually involve distressed properties under fair market value that you can renovate to increase their value. Do your best to find the best place to invest in real estate and slowly narrow your search down according to your
- Renovating the property. Keep the renovation cost limited only to specific improvements that will have the biggest ROI.
- Renting. Many banks refuse to refinance unoccupied investment properties. So, to start building your cash flow, you should find reliable tenants as soon as possible. Your rental income will pay the mortgage and build equity.
- Refinancing. After you’ve started to rent out the property and allowed your loan to become seasoned, you can apply for refinancing at its ARV (After Repair Value).
- Repeat the cycle. Use your cash-out to invest in more property and repeat the cycle.
A bear market is the perfect time for finding real estate investment opportunities under fair market value.
Conclusion
Real estate investments don’t work in days or weeks but rather in years. The holding period of such investments is about two years, while some go up to ten. It means that your investment is capable of riding any current market volatility and eventually sells when the market stabilizes. The panic selling mentality won’t get a hold of you because real estate is illiquid and you can’t sell whenever you want.
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