Exactly what is a market correction?

By Shawn Lackie

If you looked up the term Market Correction in a reference book or online, you would see: “A market correction is a short-to-medium-term decline of 10 to 20 percent in a major stock index or individual stock from its most recent peak. These are considered normal, healthy market events that reduce overinflated prices and bring valuations back in line with economic fundamentals, usually lasting weeks or months.”

Here are some key factors influencing market corrections: Magnitude: A drop of at least 10 percent but less than 20 percent. Duration: Temporary decline, typically lasting a few weeks to several months. Purpose: Calms overinflated markets and resets valuations, often occurring when prices have risen too quickly. Frequency: They occur relatively often, sometimes multiple times in a decade, and are seen as a natural part of the market cycle. Distinction: Less severe than a bear market (a drop of 20 percent or more) or a market crash (sudden, drastic decline).

Sadly, in the world of Real Estate, it’s not quite that easily defined. Especially when you have a myriad of opinions on the topic. It just confuses things. We are in the midst of a major market correction in the Real Estate industry. Because this crazy business always goes in cycles (and always has). When something goes up, it is bound to come back down. Let’s face it, things have been going up, up, up for a number of years, so you just knew there was a correction lurking in the bushes. And here it is.

Real Estate usually goes through 10-year cycles, but with the crazy events over the last few years, there wasn't a normal cycle at play. The last downturn was from 1988 to 1998, pretty much. We sold, bought, sold, and bought over that 10-year period, and let me say it wasn’t pretty. But I learned a lot. 1989-91 was particularly brutal.

Businesses' lines of credit were drastically cut back, and more than a few went under. People were losing their homes because they simply couldn’t afford them anymore. Then we hit the new millennium, and bam, the upward trajectory started.

With the exception of a flat period in 2008/09, the world of Real Estate has been steadily on the rise; add in the pandemic, and you have a recipe for disaster. Which is basically what we got. People overpaid for homes in bidding wars because they could “afford to” with interest rates so low. A lack of inventory fuelled bidding wars. Under all this, there was a feeling of unease and tension because the pandemic had never been experienced at this level before.

The overbidding/overpaying lingered like a bad hangover for a couple of years, until 2022/23, when things took a decided turn for the worse. Interest rates started to climb crazily with no end in sight. Now those mortgages on million-dollar properties didn’t look so good when you added 4 or 5 percentage points to them. Ouch.

So that’s where we now sit. Prices are coming down. Interest rates have moderated. Inventory is low. Unrest and anxiety are still high due to political factors. We have a ways to go before we can say the market has corrected completely. But it’s coming.

Feel free to check out this story and more on my blog site at: https://slackie14.wixsite.com/buy-sell-and-more.