Have questions about home price volatility and the risk it brings? We talk about what is volatility prices, the risks it possesses, and how to mitigate it.
From the outside, the real estate industry may look like a bad of roses that make fortunes for investors. But is it really the case? Does investing in real estate properties mean you won’t experience financial losses? The answer is, “It doesn’t.”
Home prices can get volatile and cause headaches for investors and other stakeholders in the real estate market.
Imagine a first-time buyer who has invested in a house as a long-term investment, seeing the property prices rapidly pummeling and rising. That will be a daunting experience for them.
That’s what is called home price volatility.
Before we move on to the risk and mitigation techniques, let’s first understand home price volatility. This is the consistent fluctuation of home prices over a long period. Some factors that can trigger price volatility include economic changes, fluctuation in interest rates, imbalance in supply and demand, and more.
One of the examples where we experienced home volatility prices is during the COVID-19 pandemic. In 2020, house demand decreased as lockdowns were imposed in various states. The major reasons the demand decreased during COVID-19 were the rise in unemployment, losses of income sources, and various uncertainties.
Explore: Get The Estimated Property Value
Now that you understand what home price volatility means, let’s talk about some of the risks that come with it.
When you buy a home on a mortgage loan, you need to pay monthly payments to repay the loan with interest. Doing so can keep increasing your home equity until you’re 100% homeowner. That’s the usual process.
But during home volatility price, you may owe more than your actual home purchase. In this situation, you might need to pay more than the home value when you bought it.
With all the uncertainties during the home price volatility period and the demand for real estate going down, it can be hard finding buyers for your home.
For obvious reasons, home buyers may not have the confidence to make such a massive investment as they will be unsure whether the property will appreciate. If it doesn’t, the investor will have to suffer a massive after making such a large investment.
You will have a very limited group of people willing to take the risk and invest in a property.
What will you do if you are offered very less mortgage rates at favorable terms? Surely, you’d want to take benefit of it. But that joy might be short-lived..
Opting for an adjustable-rate mortgage means you might get favorable terms and lower interest rates at the start. But, in situations like price volatility, the lender has the control to increase the interest rates on your mortgage. This means your monthly payments may increase and mess up your home expense budget.
If you don’t have the finances to pay off the higher mortgage, it could lead to home foreclosure, and you may need to buy another home.
Buying a home is a long term investment, and you will be expecting the property to appreciate. But the volatile home price market may ruin your plans.
If you purchased your home when the industry was high and you’re selling in a volatile market state, you may not be able to sell it at a profit. You may either have to sell the property for a loss or wait for the home price volatility to end.
We have said it is difficult to find a home buyer when the market is volatile, but it’s not impossible. But even if you’ve found a buyer, they’ll still need a lender for a mortgage loan.
In uncertain situations when prices are volatile, lenders become extra cautious when approving loan requests. Some lenders do it but at very unfavorable terms.
So, your potential buyer may have a hard time finding the finances to buy your house.
After discussing the potential risks of home volatility, we understand you’d be worried about how to protect yourself from serious damage.
Here are ways to control the negative impacts of price volatility.
Having a diverse investment portfolio is one of the best risk-reduction methods in most situations. In the real estate industry, we recommend investing in different types of properties in various locations.
Price volatility is usually restricted to specific regions and sectors. So, apart from residential, we suggest you invest in commercial and industrial properties as well. This can balance out the risk for you.
As some properties might experience low home prices, others would be doing well. You can maintain a stable income stream even in a price-volatile market.
As we have mentioned, one of the risks of home price volatility is the increase in your mortgage loan interest rate. Instead of being tempted by the low interest on your adjustable-rate mortgage, we suggest going for a fixed mortgage rate.
This ensures your monthly payments remain the same till the time you have repaid your entire mortgage loan. Regardless of the market situation and how the price volatility is impacting the real estate industry, you will have a fixed monthly mortgage payment.
Explore: Get Today's Mortgage Rates and Stay Informed
It is hard to predict or anticipate when home prices will get volatile and the real estate market will become unstable. But that doesn’t mean it is impossible.
You can keep up-to-date with the trends and happenings in the real estate industry. Apart from reading articles and news, one way to know what’s going on in the real estate industry is to contact experts.
Real estate professionals usually have experience in dealing with home price volatility. They can guide you through the volatile market state and recommend investments that mitigate the damage in the volatile home price.
Explore: Find a Real Estate Expert
Instead of being daunted and worried about the situation, you should reassure yourself, “This is a temporary situation,” because it is. All you need is patience and sitting on your property until the situation improves.
This will allow you to weather the short-term fluctuations in a price-volatile market. When that situation improves and your real estate professional gives you the go-ahead, you can start investing in properties or think about selling your home.
Building your financial reserves for the unstable market situation is like keeping a fire extinguisher to protect yourself from a fire breakout. This will ensure that even in a market where home prices fluctuate, you may have enough financial assets to avoid financial strains.
These finances can also help you deal with unexpected expenses until the real estate market stabilizes again.
Price volatility doesn’t come knocking. To make sure you aren’t negatively affected by it, you should first understand the risks it brings.
Now, you not only know the risks price volatility brings, but you also understand how to mitigate those risks by being proactive. If you want to know more about the threats price volatility brings, and how you protect yourself, our experts at HAR are waiting to hear from you.
We are a Texas-based real estate agency to help potential homeowners make winning high-return investments in even the most challenging market situations.
Home price volatility refers to the consistent fluctuation of home prices over an extended period. It can be caused by various factors, including economic changes, fluctuations in interest rates, supply and demand imbalances, and more. This volatility can lead to uncertainties in the real estate market.
Home price volatility can pose several risks, including negative home equity, difficulties in selling a property, challenges with adjustable-rate mortgages, decreased profitability for property investors, and financing issues for potential buyers. These risks can affect homeowners and real estate investors during periods of price volatility.
To mitigate the negative impacts of home price volatility, individuals can consider the following strategies: diversifying their real estate investments, opting for fixed-rate mortgages, staying updated with the latest real estate news, making long-term investments, and maintaining backup financial reserves. These approaches can help individuals navigate price volatility and protect themselves from potential financial strains.
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