Guiding Your Clients Through a Recession
November 28, 2022
The real estate market is constantly changing – year to year, week to week, even day to day. Throw in a global pandemic, the impact of which we are still grappling with, and it’s safe to say that it’s a confusing time in the market.
Is the U.S. headed toward an inevitable recession? Forecasts range widely, but unstable economic activity like high inflation, rising interest rates and an unpredictable stock market have many economists predicting that the chances for a recession are high (50% or above).
Other experts believe that chances are low or are confident that any impending recession will be “brief and mild.” Part of the reason for this uncertainty spectrum is that there’s no universal definition of a recession. One widely accepted definition of a recession is two consecutive quarters of economic shrinking. By that standard, we’re already in one.
Frustratingly, none of us have a crystal ball, and it’s impossible to say what the real estate market will do in the next day, week or year. Still, history shows that recessions significantly impact the real estate and housing market. Supply will likely outpace demand as fewer people have the means to purchase a home, which means longer periods on the market and falling home values.
The good news is that the real estate market has weathered recessions before and it’s certainly going to weather them again. Many buyers, sellers and homeowners make it through an economic downturn with no problems, and many have been able to make smart investments that have seen great returns in the years to follow.
Here are some tips to help guide your clients through this tumultuous time in the real estate market.
The bottom line: ebbs and flows are completely normal in real estate. Even during economic uncertainty, real estate tends to be less volatile and more resilient to market changes than other assets. Home prices in today’s market are quite turbulent due to various factors, including supply chain issues, rising interest rates and the ongoing pandemic. We’re coming off two years and counting of labor shortages, facing massive material shortages that have driven up prices, and more Americans than ever are looking for housing. All these factors add up to the market we’ve been facing: high prices and low inventory.
That said, any market fluctuations occurring today or in the near future are not likely to have a substantial impact on any long-term investments. If you look at 100 years of housing price history, there’s no point when housing has lost value over a 20-year period. Many homeowners who purchased properties at a time when it felt most precarious to do so—during the 2008 crash—have since seen a huge return on their investment.
Looking at the cyclical nature of the market over time and helping your clients see it as such is helpful. At the end of the day, reassurance goes a long way right now.
Set Expectations for Buyers
First-time homebuyers may find some value in waiting until prices stabilize, but it’s also important to recognize a good deal, no matter the market fluctuations. Buying a home is a valuable long-term investment. First-time homebuyers are typically looking for a long-term investment, in which case you can help them find a property that will likely appreciate in value. As history shows, in most cases real estate does appreciate over time.
It’s often the case that when the masses are running away from an investment, it might just be the best time to buy. Take the recession of 2008 for an example – everyone was running from the real estate industry when tremendous deals were to be had. If buyers can afford to purchase a property with a potential return on their investment, there’s no real reason to hold off. The exception to the rule is any clients you have who are looking specifically for short-term real estate investments.
Set Expectations for Sellers
If we are looking toward an economic recession, it’s possible that home values may go down before they stabilize. As I mentioned above, real estate investments are historically sound, and real estate portfolios should still see consistent, reliable earnings and savings. They might be hesitant to sell their home at their current interest rate, only to buy a new home at a higher interest rate. Help your selling clients stay up-to-date on trends like interest rates, tax considerations, and your local market to determine how comfortable they are making a new investment.
Whether or not a recession is a good time for your clients to sell their home will depend on the price at which they purchased it initially. Make sure to consider second mortgages as well. If home values are significantly higher than the time of purchase (even if they are relatively lower in the short term), it might still make sense to sell for a profit.
The good news is that at this point, most experts say we’re not in an actual housing bubble. Yes, things are a little chaotic, but the circumstances of 2008 are not the same circumstances we’re in today. There are important differentiations like more strict loan qualification factors and low inventory. We’ve seen the housing market correct itself in the past and will correct itself again. It’s nearly impossible to say what will happen when the COVID-19/inflation/supply chain dust settles, but we can look to past recessions and the eventual recovery of the real estate market to gain a better understanding of what’s happening right now.
Source: Guiding Your Clients Through a Recession National Association of REALTORS® (November 4, 2022) Kaycee Miller