What your clients might be interested in is not the bubble, but how to recession-proof their retirement. Solid financial plans, with specific goals and regular review, are already recession-proof. Reaffirming that information to clients who are nervous about a real estate market bubble is probably the most helpful advice an advisor can give.
They are sure to crop up every Spring as reliable as tulips: client real estate questions. In a hot market, clients’ concerns about losing out on opportunities to sell their homes (and funnel the profits into their retirement) may poke up out of even the most steady and steadfast investors. In a slow market, clients may think that they should scoop up housing opportunities and hold until a market rebounds. Others may wonder when it’s time to downsize into a retirement home, and hope to plan their moves to catch the real estate market at its peak bloom. The real estate market may not be the Tulip Mania of the 1630s, but the frenzy around client questions may feel the same to advisors. Market bubbles could become more common. It never hurts to reaffirm how to talk to clients about them. Here are a few key points from industry experts.
Many home owners braced for a decrease in their home’s values at the beginning of the pandemic, fearing the job losses and unemployment could push the US into a recession. Instead, the shortage of supply drove an even stronger market than ever. Some markets saw a 10.5% increase in home value in 2020.[1] That kind of growth hasn’t happened since 2014.[2] Mortgage analysts believe that the rising price of houses is caused by “record-low mortgage rates and the severe undersupply of for-sale homes.”[3]
The real estate market may not be a bubble per se, but may feel like one to your clients. Bubbles are often thought of as a “situation where the price for something—an individual stock, a financial asset, or even an entire sector, market, or asset class—exceeds its fundamental value by a large margin.”[4] One writer referred to them as “diabolically difficult to identify without the benefit of hindsight.”[5] The inability to spot a bubble necessitates a careful discussion with investors and clients about the need for long term strategy in investing.
In our past articles about cryptocurrency [6] and the bitcoin bubble, we noted that talking to investors about the timing of their interest in the bubble is often a good start. Usually, interest in investing in a bubble coincides with a feared recession. In this case, the real estate bubble is not necessarily linked to a coming recession but to a weird set of circumstances driving shortage of supply. However, other bubbles, as we noted in cryptocurrency article, are timed near recessions. For example, beanie babies were hot during the recession in the 1990s. Similarly, the real estate boom of 2005 and 2006 coincided with the end of the recession following the dot.com bust. What your clients might be interested in is not the bubble, but how to recession-proof their retirement. This could be particularly important for GenX investors who have lived through the stock market crash of 1986, the dot.com burst, and the real estate crash of 2005. Advisors who spot those emotional triggers can help clients by discussing risk management and how non-stock investments generally fair over the long term.
Bubbles, by anyone’s definition, are usually thought of as involving stocks or commodities that are given a higher valuation than they are worth. Solid financial plans, with specific goals and regular review, are already recession-proof. Reaffirming that to clients who are nervous about a real estate market bubble is probably the most helpful advice an advisor can give.
For more information on communication and stress, see our article on How to Speak Stress.
[1] See this article on real estate investing in Salt Lake County, Utah:
https://www.noradarealestate.com/blog/salt-lake-city-real-estate/
and this article on the state of the Philadelphia, PA market:
https://learn.roofstock.com/blog/philadelphia-real-estate-market
(both report increases in the 10.5% range).
[2] For more information on housing growth, see this article
https://themreport.com/daily-dose/02-23-2021/rates-supply-shortage-drives-home-price-surge
[3] For the full quote, see the above article.
[4] For more on the definition of an investment bubble, and the five stage of a bubble, see this article in Investopedia: https://www.investopedia.com/articles/stocks/10/5-steps-of-a-bubble.asp
[5] For more of Jason Zweig’s excellent article on bubbles and economic theory, see his article in the Wall Street Journal, reprinted here: https://www.livemint.com/market/stock-market-news/a-stock-market-bubble-it-s-more-like-a-fire-11606036524345.html
[6] For the full article, go here:
https://www.bcgbenefits.com/blog/crytpo-currency
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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