What is a Bear Market in Real Estate? It’s a Different Animal Than You May Think

The U.S. economy has experienced some significant shifts this year. Inflation is at a 40-year high, interest rates are rising, and the stock market had its worst first-half performance since 1970. 

Then, on June 13, 2022, the S&P 500 index fell 21.3% and the stock market officially entered a bear market. We know this was bad news for the stock market, but what (if anything) does it mean for real estate? Here are the key things you need to know — as well as how to capitalize on any big changes that could be coming down the road.

What is a bear market in real estate?

According to Mike McElroy, the managing broker for Center Coast Realty, a bear market occurs when prices drop by more than 20%. Similarly, a bear market in real estate would be defined by housing prices falling by 20%. “It’s important to note that this has only happened once in the real estate market in at least 35 years,” he says. “It’s happened five times in the stock market over that same period.”

“Real estate prices tend to be a lot steadier than other asset classes,” McElroy adds.

The last bear market in real estate occurred in 2008 when the housing bubble burst — sending home values plunging and putting many homeowners into foreclosure. And while some homeowners and investors may be having flashbacks to those years as the market shifts, real estate and financial experts agree there’s no reason to panic.

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“This is very different from 2008,” says Michael Collins, a professor at Endicott College in Beverly, Massachusetts, as well as the founder and CEO of WinCap Financial. “Anyone who bought a house in the last three years has a ton of equity.”

“A bear market is defined as a 20% decline in prices and we’re certainly not seeing that in real estate,” he says. “With inventory increasing, the asking prices might be lower. But that’s not a real decline.”

On top of that, he says, there is still a housing inventory shortage, with demand continuing to outpace supply. “The prime American household formation age is in the early 30s. There are still a lot of individuals and young families who are in the market for their first home.”

Frank Procopio, a real estate agent with over 17 years of experience in the Syracuse, New York, and Naples, Florida, real estate markets, agrees. “I’ve been getting calls saying that houses are dropping in value. However, what they’re seeing is that houses aren’t getting three times what they’re worth like they were a year ago — they’re getting two times what they’re worth instead.”

“There’s a difference.”

Is it good to buy or sell real estate in a bear market?

As McElroy pointed out, although stocks rise and fall, the real estate market goes through far fewer dramatic shifts. A big reason for this is that the need for real estate is a constant — people will always need a place to live and businesses will always need space to operate.

In fact, in a full 90% of the bear markets that have taken place in the last 70 years, real estate has continued to increase in value. Through all the economic ups and downs, the Case-Shiller Index shows that real estate has consistently produced a 4.6% annualized return in bear markets since 1950.

“Real estate has always been a proven asset,” Procopio says. “As cryptocurrency took off I actually saw a decrease in the number of my real estate investors because they poured all of their money into crypto. But the moment it crashed, they wanted to put it back into real estate.”

“I always recommend buying assets, not liabilities,” he says. “And what better asset than real estate?”

As the economy has shifted this year, interest rates have almost doubled from where they were a year ago. But despite the rising rates and the other economic shifts, McElroy says it’s still a good time to buy. It just might not be quite as good a time to buy as it was two years ago. “That was probably a once-in-a-lifetime buying opportunity.”

If you do plan to invest in real estate (during a bear market or otherwise), it’s key that you have a trusted real estate professional by your side. “You need to find a trusted real estate agent with boots on the ground who really understands the market and understands investments,” Procopio says. “There are 1,000 different ways into real estate that work — you need to find a market that works for you.”

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Who can benefit from a bear market in real estate?

Despite this year’s economic challenges, the real estate market is strong — and opportunities abound for motivated buyers and sellers who are looking to make a move. In fact, Christopher Roberts, a mortgage loan officer for American Mortgage Network, believes that some of the shifts we’ve seen in the housing market this year have actually been for the benefit of buyers — first-time homebuyers especially.

“Over the last two years we’ve seen insane amounts of overbidding on homes, something a lot of young clients couldn’t afford,” he says. “In the Denver market, we saw houses go for as much as $100,000 to $200,000 over asking price.”

Now, he’s seeing less competition in the market and better opportunities for buyers to find a home they can afford and have their offer accepted. “Yes, the rates are higher, but that’s why we’ve seen the resurgence of adjustable rate mortgages and seller buydowns,” he says.

McElroy expects buyers will have an easier time buying a home in this market, as well. “The good news for buyers right now is that as we enter the second half of the year, the market naturally cools off seasonally,” he says. “Along with the macro trends, that means they’ll have an easier time buying and face less competition.”

If in the future housing prices fall and we enter bear market real estate territory (which is not something experts expect will happen anytime soon), the market environment can provide opportunities for buyers and investors to benefit from the falling house prices by buying homes at a discount — and holding them until their value rises. The common mantra of “buy low, sell high” applies here — and can lead to healthy profits for investors who purchase wisely.

If you’re looking for other assets to invest in during a bear market, consumer staples, utilities, and healthcare are considered good picks. In 2022, Kiplinger recommended stocks such as Berkshire Hathaway, CVS Health, Coca-Cola, United Healthcare, and Mondelez International (the company behind Oreo cookies).

Remember: A bear market doesn’t necessarily mean a bear market in real estate

If you’re considering buying or selling property this year, it’s important to keep in mind that trouble on Wall Street doesn’t equal trouble on Main Street — the two markets are distinctly different.

When it comes to some of the changes we’ve been seeing in real estate, Procopio believes that they are all signs that the market is going back to normal after a few record-breaking years. “I still think it’s a healthy market,” he says. We’re seeing values continue to rise and banks are still lending.”

“What we saw over the last 24 months was created by COVID-19 and that was not normal. In my opinion, all we’ve done is gone back to what a normal real estate market should look like.”

The best way to make sure you have a handle on the current market conditions is to have a trusted real estate professional by your side. From understanding the impact of the current market shifts to helping you make the most of a bear market, an experienced agent can help you maximize your investment — regardless of the market conditions.

HomeLight’s Agent Match tool makes it easy to connect with top agents in your area. Simply answer a few questions and you’ll receive a list of top-performing local agents within minutes.

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