Financial turmoil and the Real Estate market—what a fascinating relationship!
You might wonder, ‘How quickly does one ripple in the economy turn into waves crashing down into real estate?’ It’s not overnight. But effects can appear surprisingly fast depending on the crisis.
The Real Estate Market: Slow to React, But Not Immune
Unlike stocks or cryptocurrencies that nosedive within hours, real estate reacts more slowly. Housing and investment properties take their time. Why?
Because buying or selling isn’t something people do impulsively—it’s a major financial decision. But don’t be fooled into thinking it’s immune to financial chaos. The cracks start to show within months, sometimes even weeks, depending on how bad things get.
For example:
Early Warning Signs: You might notice fewer properties being sold, lending approvals getting harder to secure, and buyers suddenly acting more cautious or lowering their offering prices. These are the first signals that financial turmoil is creeping into real estate.
Just yesterday I was speaking with a client who has been delayed TWO months on an investment property closing with a bank they have an existing relationship with…this is NOT a good sign.
What Causes the Domino Effect?
Here’s where things get interesting. Financial instability doesn’t just knock politely at the real estate market’s door—it barges in through multiple entry points:
1. Credit Crunch:
Banks and mortgage providers tighten lending rules when they’re feeling shaky. Suddenly, those easy-to-get mortgages disappear, and buyers either can’t qualify or have to settle for more expensive debt (if they or their investment property even qualifies). Demand drops, and prices start sliding.
2. Consumer Confidence:
When people feel uncertain about their jobs or savings or their livelihood, they’re far less likely to commit to big purchases like homes, and investors consider the ripple effect of economic uncertainty on their tenants, who may be at higher risk of default. “Maybe I’ll wait this out,” they think—and that waiting game slows down the market.
3. Job Losses:
Financial turmoil often leads to layoffs. Companies cut costs to become stronger during economic storms, and this directly reduces purchasing power. Fewer buyers mean fewer sales—and eventually, lower prices.
How Fast Does This Happen?
The 2008 Global Financial Crisis: This was a perfect storm where housing itself was at the center of the chaos. Home prices started falling within months as job losses mounted and borrowers couldn’t pay their mortgages. Defaults skyrocketed, foreclosures spread, and demand dried up.
By 2009, prices had plummeted by over 20% in many areas, and up to 60% in others. As everyday consumers lost their jobs, they stopped spending, which impacted retail stores, and the unemployed were not going into offices, which affected occupancy.
What started out in one corner of the economy became a tidal wave across nearly the whole economy. In milder crises, like oil price shocks or pandemic-induced slowdowns, real markets tend to react more gradually, over several quarters and into years rather than weeks and months.
What Happens Next?
Once financial turmoil sets in, here’s what you can expect:
– Price Corrections: As demand falls and supply builds up (think about rising defaults, forbearance, and foreclosures which all lead to rising inventory of unsold properties), sellers react by dropping prices in an effort to entice any potential buyers in the market place. If not, buyers materialize, sellers further drop their prices and those that might consider selling choose to stay out of the transaction market to wait for price stability. It becomes a massive waiting game.
– Rental Market Shifts: As credit dries up, buying becomes unaffordable due to high interest rates or tighter credit rules. Buyers and investors turn to renting, if they have employment/income and if they can get approved. Depending on the severity of unemployment, this may actually push down rental prices as demand falls. In turn landlords retreat and offer significant incentives to entice renters and attempt to push their occupancy levels back up. If employment does not falter, then landlords can actually see greater demand and achieve higher rental income as tenants seek quality properties.
So… How Quickly Does It Really Happen?
It depends on how bad the financial turmoil is and how connected it is to housing (like in 2008). While stocks might crash in a day, investment real estate and housing tends to take months or even quarters before significant changes appear—but once they do, they can last years.
The bottom line? Now is the time to secure your financial footing.
Continued economic turmoil regularly leads to lower cost of debt (mortgages), even as the approval process may become more challenging.
Having breakfast with an industry peer this week, he remarked that given his view of the economic uncertainty driven by politics, he’s seriously considering selling his real estate holdings and moving into safe, short term investments and then returning to investing in 12 to 24 months.
Granted, he is an industry professional, an insider, if you will. Yet his point is valid…He’s very attentive to not over-extending himself financially right now.
There are early indicators that the storm is brewing!
Your property is going to be impacted. Are you ready?
We’re here to help when you need it. PahRoo helps you make confident decisions today that transform tomorrow.
Need insights on how economic shifts affect your property value? Contact PahRoo Appraisal & Consultancy for expert guidance.