There’s been a lot of talk in the news lately that we may be about to enter into a recession. But what does that mean, especially for real estate and real estate agents?
To understand what a recession is and how it may impact you, first, you need to understand what a recession is. In general, a recession means that there is less economic activity for an extended time period.
What that means is slower economic growth, funding is harder and more expensive to get, and fewer jobs become available.
In real estate, there’s a misperception that a recession kills the business.
The Truth About Recessions And Real Estate
Recessions are real and can hamper your economic outlook. However, they aren’t something like a once-in-a-century thing; recessions occur all the time.
One of the biggest misconceptions people have when they hear the words recessions are all doom and gloom. But if you look at the history of the US economy, the longest recession lasted for only 18 months.
Think about that; it’s not a very long time.
Look, while other industries and investments suffer from the downturn that is defined as a recession, historically, home prices are less impacted. Outside of 2008, when the housing crisis occurred, housing prices continued to improve even in recessions.
Real estate provides a safe place for people to put their money into. First, however, you need to begin to educate yourself on the changing reality of a shifting market to better inform your clients about the impact of borrowing on sellers and buyers alike.
Housing Prices Will Continue Rising
Understanding what a recession would mean in real estate means you need to understand the history of recessions and how they’ve impacted the housing market. Yup, that’s right, you’ll need to study some economic history.
Since 1980, there have been 6-cycles of recession, and home prices have increased in four years.
A recession will slow down the pace of home sales a little, but there are two benefits to this slowdown. One, a seller will be able to find much more qualified buyers due to rising interest rates. Two, even though housing prices will slow down, they will still appreciate over time.
Combining the fear of increased borrowing costs and an extremely low inventory will continue to send home prices upward.
Understanding the basics of the shifting economy will help you educate and guide your clients into making the best deals as home prices continue to rise.
So when other parts of the economy slow down, real estate is nearly recession-proof as an investment opportunity for homeowners.
The gains that homeowners saw in recent years aren’t going to be as incredible, but home prices will continue to rise, especially as inventory remains low.
Of course, there can always be an unprecedented outlier, like we all experienced during the pandemic, but those are rare and few.
Beware The Black Swans
Before people discovered black swans in Australia, the entire world thought that swans could only be white. The discovery changed what people thought, and their discovery seemed so shocking that people were stunned.
A black swan event is an outlier that, in hindsight, makes sense but the shock of it occurring seems overwhelming and not possible until it happens. The 2008 housing crisis was one such black swan event that, in hindsight, made sense it would be possible, but before and during the event, it seemed outrageous.
Of course, there are always black swans out there that come out of the seeming blue and catch everyone off-guard, but in general, housing will probably continue to appreciate and increase even in a recession.
Interest Rates Will Increase Costing Borrowers More
The one impact a recession will have on the real estate market is that as interest rates increase, it will cost borrowers more to get their loans. As lending becomes tighter, it also means that borrowing will become more challenging and competitive for some.
As an agent, you’ll want to educate your buyers about steps to improve their credit rating and prepare for potential lending, such as pre-approval letters and proof of funding.
For agents working during a shifting market, you’ll need to strategize ways that you can position yourself as a resource that will help people navigate the market shift.
One of the strategies that you should consider is to become the go-to expert utilizing the power of digital marketing tools.
Consider creating digital courses and books that help educate your potential clients and position yourself as an expert in the changing landscape of the new reality in the market.
One of the things you’ll want to educate your clients about is the possibilities in the shifting market.
For sellers, you’ll want to educate them that a recession means that the incredible buying frenzy we saw in the market from 2020 until this past summer will cool a little bit. There are signs that this is already happening as inventory is still sparse, but deals are taking a little longer to complete, and homes are sitting on the market for 30+ days now.
The good news is that you’re getting much more qualified potential buyers looking at your house and making an offer as a seller. You’re not going to experience as many returns or back-on-market issues due to some buyers pulling out after making an offer.
And for buyers, you’ll want to explain that it may seem like they missed out on the historically low-interest rates of the past, and buying a home will be a little more expensive–but that’s a short-term thing.
Once interest rates come back down, they can refinance the loans at better terms, lowering the out-of-pocket expenses and cost of the purchase.
Keep in mind that recessions are temporary and will eventually subside.
And once the economy turns around, you’ll be able to refinance at terms much better for you, but with rising appreciation, the home you own now will have increased, and you’ll have more equity once we come out of recession than before.
Mortgage Rates Will Begin To Fall
One of the weird facts about the impact of a recession on housing is that in the past five recessions, while interest rates rose, housing values increased, and mortgage rates fell.
Say, what? That’s right, mortgage rates fell by nearly 2%, which continued for some time, even after the economic turnaround.
As an agent, you’ll want to educate your clients about the reality of the impact a recession may have on your clients and have some data to share with them.
So, getting into a home right now is a good strategy for your buyers. Putting them in touch with a private lender that can explain the advantages of buying now is one strategy you can use to separate yourself from other agents.
How To Benefit From A Recession
Most people in a recession slow down and stop all spending. However, the reality of this strategy is that while you may be able to keep a little cash closer to home, it’s not doing much for you. Putting your money in the mattress keeps it safe, but it doesn’t increase in value or make more money.
So how can you, as an agent, come out ahead from a recession?
The simple answer is to learn how to stand out from the other agents and do things the other agents aren’t willing to do.
To benefit during a recession, you need to have your money increase at a rate equal to or greater than the inflation rate. Therefore, a client selling a home and cashing in on the equity is a good recession beater. Also, a client buying a home during a recession positions them for huge gains once the economy turns around.
Educate Your Clients And Stand Out From The Rest
Educating your clients about the importance of their needs over the shift in the market is the best thing you can do as an agent.
Your clients may need to move right away or be in a position to wait a bit.
When someone asks you if they should sell now or wait, the first thing you should ask them is what they need to do. Once you can establish their needs, then you can set out to explain how a possible recession can assist them.
In other words, there’s no right or wrong answer, just one specific to your client’s needs.
Information is compelling as both a tool to assist you and lend credibility to you and your brand.
Imagine if you could create a guide that helps outline the process of what your client needs to know as a potential buyer and what are the strengths of being a seller in a recession.
If you can package necessary details and information that you can email or send out, it’s a way for you to stand out with your brand in an uncertain market. The best part is that it shows that you understand your potential client’s needs, which separates you from the other agents trying to work with that client.
Another way to educate your potential client is by teaching them what the client should look for in an agent. For example, listing the pros and cons of different types of clients helps potential clients see the value they want from an agent.
And guess what, as you detail the features and services a good agent provides, as a prospect reads that, they can look at the author’s name– and guess what, you’re the agent they’re reading, giving you instant credibility.
A recession will slow the market down, and we’re already seeing signs of this, especially with mortgage rates and demand trends. In addition, the Fed, the agency that controls the prime lending rate, is again signaling that interest rates will increase at least 1-2 more times this year, further impacting the market.
That means buyers will need to be more qualified, but for you as an agent, you’re working with more realistic buyers, people looking at a home they can afford rather than the one they wish they could. It also means for buyer agents that working with better-qualified clients will make your offers more likely to be considered and accepted.
For sellers agents, your clients still are in an excellent position to sell for a profit. Homes may sit a little longer than the gold rush we just went through, but if you do all the little things right, your client’s home will sell at a reasonable price and without as much risk of falling out of escrow due to the better-qualified buyers on the market.
Many agents see a recession as a challenge, and some will leave the industry as a result. However, the opportunity is there for agents willing to go a little further and stand out from the typical way of doing things.
Understanding the pressures that buyers and sellers are under and educating them on the temporary status of a possible recession, as well as the advantages of selling and buying right now, will help separate you from other agents in the shifting market.
