What if the Real Estate Market Crashes?

Everyone worries about investments until they see them paying off. That's only human nature. So, you may be thinking about what might happen if the real estate market continues to deflate.

Let's look at this concern as if it only happened in the distant past. Those people with funds invested in the stock market and other investments of that type lost every dime in the Great Depression. Your current portfolio may have suffered significant losses within the past couple of years. During the Great Depression, banks closed because they could not pay their depositors. Yes, today there is insurance for the first $250,000 of each depositors' money, but who are you kidding. If things really, truly crashed to that point, the government couldn't possibly pay all those depositors right away -- if ever. Realistically, you might expect to get some portion of each dollar returned to you after a lengthy processing period. So again, in a true economic disaster, those with money in the bank can suffer huge losses.

In this extremely unlikely worst-case scenario, someone that holds real estate investment at least continues to own the title to a real property. That real property continues to retain value. It doesn't disappear as 'soft money' in banks and stocks might in a financial crisis. Soft money would simply turn into worthless paper. If this were to occur, as the economy recovered, as it always does, real estate would be one of the fastest areas to recover because people always require places to reside and conduct business.

Every time in the past that the economy has taken a down turn, it has always been those with real estate investments that survived the crunch better than others. It is also, very, very rare that real estate investments go into a downward spiral. In fact, many believe that the current level of real estate is showing signs of stabilization. When any reduction in the rate of increase in real estate values has occurred, the rest of the economy has suffered much, much more.

Further, in most situations, a real estate investment as described here is secured at no more than 70% of the market value of the property. The value of the secured property would need to suffer a 30% loss before the value of the investment would be impacted.

Next time: Why don't Banks invest?