This Is What Would Actually Happen if You Buy a House and the Market Crashes (2024)

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What Does a Housing Market Crash Mean?

First, here’s what a housing market crash actually means–it’s a significant and rapid decline in home value.

This can be triggered by various economic factors, such as:

High unemployment rates
Increased interest rates
Economic recessions
Overvaluation of properties
Tightening of credit conditions

It’s a period marked by uncertainty. You’ll often hear “Is the housing market going to crash?” become common in everyday conversations.

The Immediate Impact on Your Home’s Value

If you buy a house and the market crashes soon after, the most immediate effect you’ll notice is on the value of your property. It’s likely that your home’s market value will decrease, sometimes significantly. This can be unsettling, especially if you’ve invested a large portion of your savings into the down payment. However, it’s important to remember that real estate is typically a long-term investment. Market fluctuations, even sharp ones like during a crash, tend to stabilize over time.

Purchasing a home right before a market crash means:

Decreased market value: The market value of your new home may drop, sometimes significantly, which can be distressing if you’ve invested a significant amount of your savings.
Long-term perspective: Real estate is generally a long-term investment. Despite short-term market fluctuations, property values have historically increased over time.

About Fixed-Rate Mortgages

If you have a fixed-rate mortgage, your monthly payments will remain the same, regardless of the market’s condition. This stability can be a relief during market downturns. However, if you have an adjustable-rate mortgage, you might face increasing payments, which can be challenging if the market crash is accompanied by a broader economic downturn affecting your income.

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How To Deal Negative Equity and Underwater Mortgages

One concern homeowners and prospective homeowners alike have is ending up with an “underwater mortgage,” if a housing market crash were to happen. Being underwater can limit your flexibility, making it challenging to refinance or sell without incurring losses. It’s a tough spot, but not necessarily a permanent one, as market recovery over time can help bring your home’s value back up.

What Is an Underwater Mortgage?

An underwater mortgage is one where you owe more on your mortgage than your home is worth. This occurs when you owe more on your mortgage than your home’s current value. It can limit your ability to refinance or sell without loss.

How Quickly Can Your Home Recover After a Market Crash?

Despite immediate setbacks like a market crash, history shows that real estate markets have a tendency to recover and grow over time. This recovery can play a crucial role in restoring and even increasing the value of your property.

Historical Trends

Looking at past housing market crashes, such as the 2008 financial crisis, provides insight into the recovery process. Although the crash led to a significant drop in property values, over the following decade, the market not only recovered but in many areas, saw property values reaching new highs.

Local Market Dynamics

Recovery can vary significantly based on location. Some areas might bounce back quicker due to factors like job market stability, population growth and local economic conditions. For example, a city with a growing tech industry might recover faster than one reliant on struggling manufacturing industries.

An Example
Consider a scenario where you purchase a home for $300,000. If the market crashes and your property’s value drops by 20%, it’s now worth $240,000. While this reduction is concerning, historical patterns suggest that over the next several years, the market is likely to recover. As the economy stabilizes and grows, your property’s value could not only return to its original price but potentially exceed it, especially if you’ve made improvements to the property or if the area becomes more desirable.

Buying a House as a Long-Term Investment

Real estate should always be viewed as a long-term investment. Property values can swing in the short term, but historically, they have increased over the long term. If you don’t need to sell your home during the crash, it’s often best to wait it out. The market typically recovers, and so will the value of your home.

While short-term fluctuations can be alarming, real estate should be viewed as a long-term asset. Patience is often rewarded as markets tend to move in cycles, and downturns are typically followed by periods of growth and stability.

Potential for Future Gain

Believe it or not, a market crash can also present opportunities. If you’re in a stable financial position, a downturn in the market might offer chances to invest in additional property at lower prices. This strategy, of course, requires careful consideration and should be based on thorough research and financial advice.

How To Protect Your Home in Case of a Market Crash

While you can’t predict a market crash, you can prepare for it. Here’s what you can do:

Emergency fund: Build a substantial emergency fund to cover mortgage payments during tough times.
Have a mortgage you can afford: Ensure your mortgage is affordable, even in worse-case scenarios.
Maintain a solid credit sore: Maintain a strong credit score for better refinancing options.
Diversify your investments: Don’t rely solely on real estate; diversify your investments to mitigate risks.

Final Take

Buying a house right before a housing market crash can undoubtedly be challenging and stressful. Real estate markets have cycles, and downturns are usually followed by recovery periods. However, with a long-term perspective, a mortgage that’s manageable and a solid financial strategy, you can still come out on top.

Being informed, cautious and prepared are your best defenses against the uncertainties of a housing market crash. Remember, a home is not just a financial investment, but a place where life happens and memories are made, and that value is immeasurable.

FAQ

Will housing be cheaper if the market crashes?
- Yes, house prices typically decrease during a real estate housing market crash, making them more affordable in general. However, the overall affordability still hinges on your personal financial situation. It's important to consider factors like your own finances, your job stability, your creditworthiness and ability to get a loan, as these can be affected in a market downturn, influencing your ability to purchase, even at lower prices.
Should I wait for the market to crash to buy a house?
- Waiting for a market crash to buy a house is risky. Market timing is unpredictable, and you may miss out on homes while waiting. Loans may be harder to get, especially if the crash comes with a recession. It's better to focus on your financial readiness and the current housing market, rather than trying to time a potential crash.
Is it better to have cash or property in a recession?
- In a recession, it's usually better to have cash. Cash gives you quick access to money when you need it. Property values can go down and it can take time to sell houses. But, owning property can be good for the long run, as prices often go up again after a recession. Having both cash and some property is a smart way to balance your risks during tough economic times.

Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.

FAQs

This Is What Would Actually Happen if You Buy a House and the Market Crashes? ›

Purchasing a home right before a market crash means: Decreased market value: The market value of your new home may drop, sometimes significantly, which can be distressing if you've invested a significant amount of your savings. Long-term perspective: Real estate is generally a long-term investment.

Read On ›

What happens if you own a home and the market crashes? ›

A housing market crash often leads to an increase in foreclosure activity. Homeowners who experience financial hardships may struggle to make mortgage payments, resulting in foreclosures. Foreclosures can negatively impact neighborhoods, causing a decline in property values and an increase in vacant homes.

Discover More Details ›

What happens if you buy a house and the market drops? ›

The more money you put down on a home, the more equity you'll have from the get-go, which can protect you from market dips. If you take out a loan with little or no money down and the market drops soon after you purchase, you'll almost immediately have negative equity because you didn't have much, if any, in it before.

What happens to homeowners if the economy crashes? ›

Your mortgage payments could change drastically because of a collapsing dollar, especially if you have an adjustable rate. Those interest rates would follow the trend of the economy itself, so if the Fed raises interest rates, mortgage rates will also climb.

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What happens when the market crashes? ›

Sometimes, however, the economy turns or an asset bubble pops—in which case, markets crash. Investors who experience a crash can lose money if they sell their positions, instead of waiting it out for a rise. Those who have purchased stock on margin may be forced to liquidate at a loss due to margin calls.

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Is it good to buy a house when the housing market crashes? ›

Buying a home during a recession can sometimes be a good idea — but only for people who are lucky enough to remain financially stable. If you're thinking about buying during an economic downturn, be sure to enlist the help of an experienced local real estate agent.

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Will you lose money if you buy a house now? ›

You should buy a house now if you're prepared financially. Don't buy a house until you're debt-free with a full emergency fund and a strong down payment saved up. Mortgage interest rates should continue going down in 2024, but the difference probably won't be drastic.

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Where to put your money if the dollar collapses? ›

Though the U.S. dollar collapsing is unlikely, ways to hedge against it include purchasing the currencies of other nations, investing in mutual funds and exchange-traded funds based in other countries, and purchasing the shares of domestic stocks that have large international operations.

Explore More ›

Is it better to have cash or property in a recession? ›

Cash. Cash is an important asset during a recession. Having an emergency fund to tap if you need extra cash is helpful. This way, you can let your investments ride out market lows and capitalize on long-term growth.

What happens to social security if the dollar collapses? ›

If no action is taken and benefits are reduced on a proportionate basis when the trust funds become exhausted, total income of those at the lowest economic levels will be affected the most, significantly increasing the numbers of individuals in poverty and eligible for Supplemental Security Income or other means-tested ...

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Should I buy during a market crash? ›

Buying stocks when the overall market is down can be a smart strategy if you buy the right stocks. You could pick up some blue-chip winners that will perform well in the long run. Weaker stocks that rode the market higher are better avoided. The same rule applies to selling when the overall market is down.

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Where should I put money in a recession? ›

Here's a look at some investments that may hold up better than others during a recession:

Traditional defensive sectors.
Dividend-paying large-cap stocks.
Government and top-rated corporate bonds.
Treasury bonds.
Gold.
Real estate.
Cash and cash equivalents.

5 days ago

See Details ›

Where should my money be if the market crashes? ›

However, several options tend to perform well or offer protection during market downturns. U.S. Treasury securities, particularly long-term bonds, are often considered a safe haven during crashes because of their government backing and tendency to rise in value when stocks fall.

Get More Info Here ›

Will a market crash affect my mortgage? ›

In summary though, stock market crashes tend to be good for the mortgage industry overall, as they result in lower rates and an immediate upswing in refis.

Should you sell your house before the market crashes? ›

Recessions often lead to job losses and tighter budgets, which can reduce the pool of qualified buyers. If you anticipate that your area might be significantly impacted by a recession, selling before it occurs could be a wise decision to avoid potential market downturns and decreased buyer demand.

What happens if the housing bubble bursts? ›

What happens if a housing bubble bursts? When the supply of homes catches up to the demand in the market, or the economy changes, the housing bubble can burst, and home prices can drop, like they did in 2008. Falling prices, combined with less demand, can make buying houses less attractive to investors, too.

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Is a market crash coming in 2024? ›

While many experts are making predictions about whether the market will crash in 2024 or how severe the next downturn will be, it's impossible to say with certainty where stock prices will be in the short term. However, the market's long-term performance is all but guaranteed to be positive.