How to guide your clients through the next market downturn

The words “housing market downturn” can spark fear in the hearts of consumers and real estate agents alike. However, experienced real estate agents know the U.S. housing market goes through cycles.

These cycles, also known as market volatility, are tied to a variety of factors from the stock market to rising construction costs to changes in interest rates.

Understanding the housing market cycle

Nationally, prices for homes have now peaked over 2006 prices. It is likely a trend we will continue to see given slow construction and regulatory issues such as tariffs that are expected to cause an increase in the cost of building.

The possibility of rising interest rates will also likely spike demand as buyers look to jump into the market with a more affordable mortgage.

Some buyers and sellers may be aware of a housing market downturn on the horizon (and be confused about what that means for their current situation). Real estate professionals know investing in a home is generally safe in the long run. However, some market conditions create a more favorable environment to leverage cash for investments down the road.

Although many consumers will initially turn to the internet for information about buying and selling, at the end of the day what they are looking for is an expert to guide them.

Sharing your knowledge

As an experienced professional you know that a home is more than just shelter; it is an investment. Viewing real estate through this lens provides you with an opportunity to touch base with your clients as to whether the current home is affordable and if it is still meeting the needs of the household.

Rising interest rates can severely impact affordability. Can homeowners with variable rate mortgages afford an increased housing cost as interest rates rise? Although the federal interest rates have remained low, there are hints that rates will rise several times this year.

Also, households with a sizable real estate investment, or those living in a city with high property taxes, may be impacted by the 2017 Tax Cuts and Jobs Act, which is expected to reduce the number and amount of deductions for some households.

Have your clients outgrown their home?

Ask your clients how well their current home meets their everyday needs. Growing families may feel crowded in the home they bought several years ago; older folks may find they need a home with everything on one level.

While clients may be tempted to renovate existing property to suit their needs, sinking $40,000 into renovations can be hard to recoup in the short run, or during an economic downturn. Tried and true advice for those thinking of selling, still applies — small things like fresh paint, sprucing up landscaping or changing out fixtures in the kitchen and baths can provide a bigger bang for the buck.

Calculating the right moves

Interest rates will likely fall back down after a downturn, making it a prime time to buy real estate. In both of the above scenarios, it could make sense to sell now, pay off mortgage debt and rent something less expensive for a couple years.

Downsizing to a rental or smaller home will provide better cash flow and allow clients to put their money in other investments that perform well when real estate is stagnant.

Buyers should be cautioned against getting caught up in market volatility and avoid buying a home at a high-interest rate and/or doing a significant renovation at this time. This way, after the housing market downturn, the home’s value won’t be diminished, leaving cash tied up in the real estate investment for the foreseeable future.

Your value is strong

The decision to sell a home is not something to take lightly. However, with an impending housing market downturn, this is a perfect time to provide value to clients by showing them an opportunity in a downturn.

Selling now could provide liquidity and cash on hand before the downturn. In this scenario, agents can help clients turn their existing investment into something that better fits their needs.

More importantly, your clients will see that you are looking out for them and will rely on you as their trusted advisor for years to come.