What is market correction? You may have heard people saying or read articles predicting a housing market correction. If you are new to real estate investing, you might wonder what it means. You might also wonder if it is good or bad. This post will explain market correction and how it can benefit investors.
What is a Market Correction and its Benefits
Understanding Market Corrections
Like many other assets, real estate prices can grow beyond the real values. In a market correction, the prices trend downward until they reach values more aligned with the market. While there is no textbook threshold, it is usually a price decrease of up to 10%. It is also important to note that the decrease is gradual.
Another important point is that market corrections can occur nationally or in specific markets. If a specific market gets hot, investors might overspend for a time. Eventually, demand will cool, and that market will experience a correction. The opposite can also be true when the overall national market is in correction. While prices might trend downward in the broader national market, you will still find strong regional markets.
Market Correction or Crash
At this point, some readers might wonder if correction is just a gentler name for a market crash. The short answer is that it isn’t. Crashes and corrections are different. Corrections are slight decreases that occur gradually. Crashes are large price decreases that occur quickly.
Corrections happen so gradually, and prices drop so slowly that there is often debate about whether one is even happening. When crashes occur, it is almost undeniable. The price decrease might occur so fast that investors can’t even vacate their positions before taking significant losses.
The Benefits for Investors
Market corrections can be complex for investors to navigate. However, there can be benefits for investors. As you might imagine, a decrease in real estate prices can present opportunities. Along with that, demand is usually down during a correction.
As an investor, a correction can be a good time to buy more properties at lower prices. First, you have prices going down. Along with that, the decrease in demand will also mean less competition. An intelligent investor will be able to leverage that to their advantage.
However, it isn’t all opportunity. Many market corrections are also times with higher interest rates. Unless you have the capital to pay outright, you might have to balance low prices against high interest rates. It is just one of the challenges investors may face during a market correction.
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