What is Real Estate Bear market?

I want to impart all the knowledge that I have about Real Estate Bear Market. So, let’s get started.

Are we in the Real Estate Bear market and if we are, when will it be over?

We know that NexTech is already in a bear market. It is down 31% from its peak as of November 19. Dow Jones’s industrial average is more than 16% below its most recent peak. From the US to China developed economies to emerging economies, most stock markets are down over 15% so far in 2022 with many over the 20% bear market threshold.

How do we define the Real Estate Bear Market?

A Real Estate bear market occurs when an average decline in Real Estate price drops more than 20% from the top of the market in terms of the average price. The cap rate decompression may happen, 20% cap rate decompression may happen due to that we end up seeing a lot of vacant properties on the market. They tend to stay longer on the market at a decrease in prices by 10% to 20%. Inventory goes up, it slows down the demand, supply tends to exceed demand and prices tend to fall a little bit.

Rents will likely decline or be stuck at the current level while cost continues to rise.

Rents will likely decline or be stuck at the current level while cost continues to rise

The question again comes whether we are in the commercial Real Estate bear market or not. We know that interest rate hikes so far have impacted commercial Real Estate values considerably. We have seen overboard either the prices have become stagnant or in some cases have gone down. We are seeing more inventory in the market. Operators are contemplating and holding their decisions. About a month ago it did not seem as if we were in a bear market, although you may tend to disagree with me, at the beginning of June we were still doing okay in terms of acquisitions and there were a lot of transactions happening. But June and mid-July or last 30 to 45 days what we have seen due to the June high-interest rate hike of 50 dips, a lot of people had panicked.

We have seen buyers going back to the seller and asking for price reduction. Why does this happen?

We have seen operators going back, buyers returning to the operators and asking for negotiation or price reduction and we have seen as much as 5% to 10% price reduction in commercial Real Estate products. This happened due to June’s interest increase and we anticipate that there would be a July 20th hike for 50% to 75% dips that may have a greater impact on value. So whether we were in a bear market at the beginning of June or not, with this rate increase of 50% to 70% in July, there is a possibility that we may end up seeing a decline in the value by more than 10% to 15%. If the ten-year treasury goes up 50% basis points, we will see a broader spread between us and offer prices. Those who are already in those contracts.

They may either end up coming out of those contracts or they may end up going back to the sellers asking for discounts because we know that numbers are not going to make sense if our interest rates are going upwards to 7% or 7.5% then those cap rates. Those underwriting are not going to work. We know that a lot of investors are sitting on the side, basically they are not buying commercial Real Estate in the anticipation of a decline in the market and truthfully even we are among those operators who are not making offers at this point. We were in a few deals and we had to come out because we are not sure how much would be the increase in ten-year treasury interest rates if the interest rate will continue to rise even after July and it sounds like it will be. None of these deals will tend to work. So my question for the group is:

1. Do you think we are in a Real Estate bear market?

2. Are you holding back from selling commercial Real Estate as prices are declining?

3. Are you holding back from buying in anticipation that prices will go down?

So these are the few questions I want to ask everybody: what are your thoughts? My thought is that we were or we will be in a bear market for the next coming months at least and the most important factors that are driving the values in 2022 are the interest rate hike right and then inflation and what’s going on in Ukraine right now and all these sanctions on Russia. Corona Virus has not helped us either and then there is the stock market volatility, basically there are a bunch of things that are happening and most important are interest rate hikes and inflation they are impacting the values of real estate considerably.

Is it a good time to buy properties in a bear market, especially Single family Homes?

Yes definitely, Why not? We should buy cheap income properties.

Buy a deal on a flip or start investing in REITs when the market has gone down, as it goes without saying that cash is the king. When everybody is greedy you take a step back or when everybody is scared you become greedy so in the bear market everybody gets scared and that’s the time for investors and operators to get in and buy some deals. These are my thoughts in addition to that I would like to discuss how long typically this bear market lasts.

They typically last for about nine months to thirteen months, most of them on average about a year or a little longer. It’s not a bad thing even whether we are in the bear market today or not and if it starts even in the third quarter of this year it’s likely to end by the second quarter of next year so anywhere from the first quarter to the second quarter or third quarter this will all be over I mean. Anywhere from the first quarter and till the third quarter-end. This is my thought and of course, I’m not an analyst in any way, but I’m sharing my wisdom.

Does the recession strengthen real estate market position in any way?

There would be a shift in wealth. It would be a paradigm shift of some sort but as long as we position ourselves for the upcoming growth, we should be fine. It’s scary to those who are stuck in deals, but eventually, it will all be okay. The next 12 to 13 months or 15 months are going to be a little bit tough. But hang on, it will all be over soon.