In real estate, panic selling involves offloading a property because of a perceived threat. While this phenomenon has changed over the years, it has not been entirely eradicated. To that end, investors need to be vigilant in making sure they don't let gut feelings influence their investment decisions. To make that process easier, here's a guide on panic selling in real estate. Read it over so you have a better idea of what you're up against.
What is panic selling in real estate?
In real estate, panic selling is a phenomenon that occurs when an investor or homeowner sells their property quickly with little regard for current housing prices. Typically, these homes will sell for far less than the true property value. That said, it's important to note that panic selling is not unique to the real estate industry. It also can occur in the stock market.
As the name suggests, panic selling often occurs when an event happens that shakes investor confidence in the housing market. For the industry as a whole, economic instability tends to be a huge driver. For example, during the 2007 financial crisis, plenty of panic selling took place when many notable financial institutions started to collapse.
Notably, panic selling is closely related to panic buying, where buyers rush to purchase homes at inflated prices because they're worried about low inventory. In both cases, these acts are usually driven by fear rather than by a rational assessment of the real estate market.
What is the history of panic selling in the housing market?
Unfortunately, panic selling has somewhat of a dark history in the real estate market, particularly one that is rooted in racism. In the past, white homeowners would often start panic selling if a family of color moved into their particular neighborhood. To make matters worse, real estate agents would often encourage this "white flight" by engaging in blockbusting, or encouraging the homeowner to sell based on the assumption that the neighborhood's socioeconomic makeup is about to change.
Fortunately, since then, the federal government and the real estate industry have taken steps to ensure that practices like blockbusting -- as well as redlining, which is the systemic, discriminatory denial of entry to a particular neighborhood -- no longer occur.
In particular, the Fair Housing Act, which was passed in 1968, prohibits housing discrimination based on race, sex, national origin, or religion. Recently, President Biden also extended the Act to provide protections based on sexual orientation and gender identity. However, in addition, the National Association of Realtors (NAR) instituted a code of ethics, which prohibits discrimination as well as specific practices like blockbusting, redlining, and panic peddling.
What investors need to know about panic selling in real estate
As an investor, it's crucial to know how panic selling will impact your investment strategy and how you should deal with it. With that in mind, we've laid out some advice for you, depending on where you fall in the transaction.
Put simply, panic selling is not a good idea. An investment property is generally meant to be a long-term investment. To that end, even if real estate sales are spiking due to economic uncertainty, you're going to want to hold on to your investment until the property market dictates when is a good time to sell.
It is critical for real estate investors to understand their risk tolerance. If you think the volatility of real estate prices will greatly affect you, it may be a better idea to look into more diversified investment strategies, like a real estate mutual fund.
On the other hand, buying an investment property when other speculators are panic selling can be a great way to score a deal on your next investment property. Typically, real estate investors who are caught up in market panic are so eager to unload their properties that they will do so below the actual property value, which in turn can help pad your bottom line.
By the same token, try to refrain from panic buying. Often, in certain phases of the real estate cycle, low interest rates will lead to low inventory, which causes real estate prices to rise. In this case, if you buy when prices are high, it is usually difficult to recoup your investment when you are eventually ready to sell.
The bottom line
These days, panic selling usually has more to do with economic instability than racial bias. Still, if left unchecked, this phenomenon can have a negative impact on investors' bottom lines. In light of that, no matter what your investment strategy looks like, it's absolutely crucial to make sure you're able to withstand market fluctuations and to ensure you're making investment decisions based on tactical analysis rather than uncertain reaction.