For decades, surging home prices created a financial cushion for property owners. Tracking the rising value in residential real estate gave homeowners peace of mind.
Advisors benefited too. Many of their clients felt more confident about their financial future because their property holdings continued to soar. Given the cyclical nature of property values, the surge was destined to end. By mid-2022, it did.
The last few quarters of weakening home prices in many regions led advisors to educate clients about what matters most. They are urging investors to stick to their financial plan — and not panic over real estate swings.
"When it comes to sinking home prices, I remind clients that a home is one of the largest leveraged purchases they will make in their lifetime," said Corey Voorman, who runs Voorman Investment Counsel in Plymouth, Mich. "That leverage comes with the opportunity to capitalize on rising home prices and the disadvantages of declining home prices."
Know Home Prices Won't Derail Long-Term Plans
He reassures homeowners that short-term gyrations in the housing market have little impact as long as they don't plan to move. Almost anyone who lives in the same property for many years will experience a softening real estate market at some point.
The challenge for advisors is helping jittery clients cope with declining home values. Their anxiety can spike as they see their neighbors struggling to get top dollar for their listings.
For Ron Strobel, the dip in home prices is no surprise. A certified financial planner at Retire Sensibly in Meridian, Idaho, he has warned clients for the last two years to rethink their you-can't-lose assumptions about buying real estate.
"Here in Idaho, we saw one of the nation's largest surges in home prices," he said. "There was a very strong belief that a correction was impossible and the massive growth would continue forever."
Plug In Conservative Numbers For Home Prices
As real estate investing intensified during the pandemic, Strobel says he "sounded the alarm that the continuous double-digit gains in residential real estate were unsustainable." He knew that homes were overpriced relative to Idahoans' income and available jobs — and that the real estate market was driven by money from wealthy out-of-state transplants or second-home buyers.
Strobel has written in client newsletters about the likelihood of a real estate downturn. And in crafting financial plans, he has a longtime practice of adopting conservative assumptions — figuring average annual growth in residential real estate of 3% to 5%.
"I've had situations where a client wanted me to use 15%, not 5%," he said. "I've pushed back when someone wanted to be more aggressive. I'm thankful for that now since using the higher number would have resulted in projections that were wildly inaccurate."
In meetings, Strobel likes to probe to determine clients' thoughts about real estate. Rather than lecture them, he invites them to express their attitude about home prices — and whether they're tempted to buy property — before he shares his recommendations.
"That's better than me doing all the talking," he said. "I'm trying to figure out if they're talking to friends about buying real estate."
If they're tempted to put money into property, he might raise questions about the timing.
"Now we are seeing a sizable correction, soaring inventory and there's talk of a major increase in inventory in the spring as nervous investors and homeowners rush to list their properties," he said.
Look Past Short-Term Dip To Adopt A Long-Term Perspective
To calm clients who purchased property in recent years and worry that they overpaid, advisors may adopt a long-term perspective. This helps homeowners view the current dip in home prices as a passing phase.
Kristy Jiayi Xu estimates that about 20% to 30% of her clients express concern about sinking home values. Many of them are in their 20s and 30s and bought their home during the pandemic.
"Because they bought their house when the market was at its highest point, they're more anxious," said Xu, a certified financial planner at Global Wealth Harbor in Walnut Creek, Calif.
She tells them to shift their time horizon. As long as they don't intend to sell their home soon, they can ride the eventual real estate recovery.
"If you're in your 30s, you have 60 more years to plan for," she said. "So this dip, even if it goes on for another year or two, is not important compared to the next few decades" of potential price appreciation.
Until mid-2022, the frothy real estate market led some eager buyers to waive the inspection. Now they may want to borrow against their home equity to pay for repairs or renovations.
Falling home prices may limit homeowners' ability to tap a home-equity loan. So advisors are underscoring the need to set aside cash reserves for home-related improvements.
