The housing market is an integral component of the US economy. It influences individual wealth and the overall economic health. There have been concerns about a market crash in 2024 primarily due to an unsustainable rate of inflation, increasing home prices, and high mortgage rates that have increased between 2022 and 2023.
A potential housing market crash is a subject of concern for homeowners, investors, and policymakers. Historically, factors like a housing bubble, where property values are artificially inflated, can lead to a sudden and significant decline in home prices.
Investors looking to get into real estate get jittery when fears of a market crash dominate the news cycle. It becomes difficult to determine and predict the profitability of the real estate industry especially with residential properties. This is why it is important to understand what happens to homeowners if the housing market crashes.
However, in the last several years, the real estate market has evolved by creating investment opportunities that are a little more immune to the fluctuations of the market. These opportunities provide better security for investment capital and reduce investment risk by investing in assets that have a low correlation to the wider market.
About CWS Investments
CWS Investments provides investors with the opportunity to build wealth in real estate without the anxiety of worrying about market crashes. We manage a mortgage note fund that invests in a portfolio of mortgage notes from 40 major US markets.
Our fund is a high-yielding, low-risk strategy that is not dependent on the market for its performance or profitability. Rather, our success is dependent on the rigorous analysis and scrutiny of mortgage notes in our portfolio and the ability of a borrower to pay their installments. For more information about a CWS’ mortgage note fund, schedule a call with the CEO and founder.
Historical Perspective of the 2008 Market Crash
The 2008 financial crisis serves as a case study in understanding the dynamics of how housing markets can plunge into severe downturns. Before the crisis, house prices had considerably soared. This was fueled by high-risk mortgage lending and inadequate regulation.
This period was characterized by an unsustainable housing bubble where property values escalated far beyond their actual worth. When the bubble burst, it led to a catastrophic drop in home prices, triggering a wider economic downturn.
Several factors contributed to this housing market crash. Lending money to homebuyers with questionable creditworthiness was rampant, and lending standards were notably lax. The abundance of easy credit, combined with exceptionally low-interest rates, encouraged many to take on mortgages they could not afford.
The crash had far-reaching effects on the broader economy. As property prices fell, homeowner equity eroded, leading to a sharp decline in consumer spending and a halt in economic growth. This was exacerbated by a tightening of credit markets, making it difficult for credit-worthy borrowers to secure financing. The collapse in home sales and home values rippled through the real estate sector, impacting not just homeowners but also investors, developers, and financial institutions.
Furthermore, the spike in mortgage rates that followed the market crash added more strain to an already struggling housing market.
The Impact of a Housing Market Crash for Homeowners
The 2008 crisis is a stark reminder of how interconnected the housing market is with the overall economic health. It demonstrates that a potential housing market crash can have profound and long-lasting effects, not just on property values and mortgage rates, but on the very foundation of economic stability and growth.
The Immediate Impact
When a housing crash occurs, homeowners feel the impact almost instantly. A typical housing market bubble bursts when there’s a realization that housing values are artificially high. The immediate aftermath of a housing market crash is a decline in home prices.
This decrease can be especially jarring if homeowners have purchased their properties at peak values. Homeowners may find themselves owing more on their mortgage loan than their property is worth, a situation often referred to as being ‘underwater’ on a mortgage.
For those attempting to sell during this period, the real estate market becomes challenging. With more homeowners looking to sell to escape higher monthly payments or unfavorable mortgage conditions, the supply and demand dynamics shift, often resulting in further downward pressure on home prices.
What happens to my mortgage if the housing market crashes?
A primary concern for homeowners during a housing crash is the status of their mortgage payments. If the housing market crashed during a period of low-interest rates, those with adjustable-rate mortgages might face higher monthly payments as interest rates rise. This situation would be worsened if the Federal Reserve responded to the housing crash by increasing interest rates to stabilize the economy.
Furthermore, a decline in housing values impacts the ability of homeowners to refinance their homes. During a healthy housing market, refinancing can be a strategy to secure lower interest rates or reduce monthly payments. However, when home prices fall, lenders become more stringent, making it difficult for homeowners to qualify for refinancing options.
Long-term Financial Implications for Homeowners
A housing market crash extends beyond the real estate sector, impacting the broader global economy. The drop in housing values can lead to a decrease in consumer spending, as homeowners perceive a reduction in their wealth.
The stock market may also react negatively to a housing crash, given the interconnected nature of mortgage-backed securities, government bonds, and other financial instruments with the real estate market.
Higher interest rates which often follow a market crash can exert additional pressure on economic growth. The Federal Reserve may intervene by adjusting interest rates or through other monetary policies to stabilize the economy, but these measures can have mixed effects on homeowners.
The housing market crash also leads to shifts in the balance between supply and demand in the housing market. After a crash, there might be strong demand due to low prices, but financial constraints and higher interest rates can limit the ability of potential buyers to purchase homes. This can further prolong the recovery of the housing market.
How Real Estate Investors Can Mitigate the Risk of a Market Crash in 2024
As a real estate investor, you need to be particularly cautious as predictions about a potential housing market crash in 2024 circulate. Understand the market dynamics and implement strategic measures that can safeguard your investment portfolio against significant losses.
Diversifying Investments
Diversification is a fundamental strategy to mitigate risk. Avoid concentrating all their assets in the housing market alone. By diversifying across various asset classes, including alternative real estate investments the impact of a housing market crash can be buffered. This approach ensures that a decline in housing prices doesn’t disproportionately affect the overall investment portfolio.
Analyze Market Trends
Keeping a close eye on market trends is crucial. Indicators such as a rapid increase in housing prices or a significant hike in mortgage rates can be early signs of a potential market imbalance. By monitoring these trends, investors can make more informed decisions about when to buy or sell properties. It’s also important to pay attention to regional market variations, as some areas may be more vulnerable to a crash than others.
Adjusting to Mortgage Rate Fluctuations
In anticipation of higher mortgage rates, which typically precede a housing market crash, you should review your portfolio to assess the impact. If you hold properties with adjustable-rate mortgages, it might be wise to refinance to a fixed-rate mortgage to avoid the risk of escalating mortgage payments.
Building Cash Reserves
Having sufficient cash reserves is essential for weathering a market downturn. In a housing market crash, liquidity can be a significant advantage, allowing investors to cover mortgage payments during periods of rental income instability or property devaluation. Moreover, cash reserves put investors in a strong position to purchase undervalued properties, often available during market crashes.
Focusing on Long-Term Value
In real estate investment, a long-term perspective can help mitigate the impact of a housing market crash. This approach involves investing in properties that are likely to retain their value over time, regardless of short-term market fluctuations. Factors like location, property condition, and long-term demographic trends should be key considerations in evaluating the long-term value of a property.
Investing in Mortgage Note Funds to Hedge Against a Potential Market Crash
Mortgage note funds have emerged as an alternative strategy for real estate investors seeking to mitigate risks associated with market fluctuations. These funds involve the purchase of mortgage notes (debt obligations backed by real estate property.) By investing in these notes, investors gain income from the mortgage payments without owning the physical property.
What is a Mortgage Note?
A mortgage note is a legal document that represents a borrower’s promise to repay a specified amount of money to a lender for purchasing property. Essentially, it outlines the loan terms, including the loan amount, interest rate, repayment schedule, and the consequences of default.
Secured by the purchased property itself, the mortgage note ensures that if the borrower fails to pay according to the agreed terms, the lender has the legal right to foreclose on the property. For investors, holding a mortgage note means they have a financial claim against the property until the borrower pays back the loan in full.
How Does a Mortgage Note Fund Operate?
A mortgage note fund operates by pooling capital from investors to purchase mortgage notes from the secondary market for purposes of investment. Here is a step-by-step breakdown of a general mortgage note investment fund operation:
- Fund Establishment: A company or group of investors creates a mortgage note fund, defining its structure, investment strategy, and goals. The fund outlines the types of mortgage notes it will purchase, such as residential or commercial, performing or non-performing.
- Capital Raising: The fund raises capital from individual or institutional investors. Investors contribute money to the fund with the understanding that their capital will be used to purchase mortgage notes.
- Acquisition of Notes: Once capital is raised, the fund’s managers identify mortgage notes available for purchase. These could be from banks, lending institutions, or secondary markets where such financial instruments are traded.
- Due Diligence: Before purchasing a note, the fund conducts due diligence to assess the risk and potential return. This involves examining the borrower’s creditworthiness, property value, and the terms of the mortgage note.
- Purchase of Notes: The fund uses the pooled capital to purchase mortgage notes. The price paid for each note can be at a discount or at par value, depending on the note’s performance and risk.
- Management of Notes: After the acquisition, the fund manages the notes by collecting monthly payments from borrowers. If notes are non-performing, the fund may work with borrowers to restructure the terms or proceed with foreclosure if necessary.
- Income Distribution: The income generated from the mortgage notes, typically through the borrower’s monthly payments, is distributed to investors. Payments can be monthly, quarterly, or annually, depending on the fund’s structure.
- Default Handling: If a borrower defaults on a mortgage note, the fund initiates foreclosure proceedings to recover the investment. After the property is foreclosed, it can be sold or held depending on the fund’s strategy.
Profits from successful investments or recovered funds from foreclosures can be reinvested into more mortgage notes. Throughout this process, the fund is typically managed by experienced professionals who navigate the complexities of the real estate and financial markets to make strategic purchasing and management decisions regarding the mortgage notes.
Build Wealth in Real Estate Without Fear of a Market Crash
CWS Investments offers an alternative investor-focused strategy to real estate investing. Our mortgage fund allows you to get into real estate without burdening you with the responsibility of ownership and management.
The profitability of mortgage notes is dependent on the mortgage borrower’s ability to pay their installments. The payment structures for these mortgages are usually adjusted to allow the borrower to get back to comfortably making their payments. This is usually irrespective of market fluctuations.
7e Investments aimed returns are distributed monthly as dividends to investors. Such a structure attempts to provide you with more money in your pocket because dividends typically have a lower tax rate.
For more information about how to invest in a mortgage note fund, talk to a CWS investment consultant today.
