When will the recession arrive and how will it impact California’s real estate market? This article discusses the timing and details of the next recession and offers advice on how real estate professionals can prepare to ensure financial success even during the coming slump.
California’s working agents
As sure as a rising tide will eventually recede, the next recession is coming.
As a result of the last recession and elongated recovery, the active real estate agent population declined 35% from 2007 to 2014. In other words, 94,000 individuals dropped out of the working agent pool, unable or unwilling to survive in the harsher housing market environment brought on by the recession and slow-moving recovery.
The number of agents has since increased steadily each quarter, while annual sales volume has been nearly constant during this recovery. Currently just over 200,000 active agents practice in California. But will the coming recession be able to support this healthy agent population? Or will the next recession see another large drop in working real estate professionals?
Agents who want to avoid being another statistic as a result of the coming recession will prepare now.
Timing the next recession
When will the next recession occur?
Economic experts forecast the next recession will arrive in 2020. But the housing market will begin to show the effects earlier — big ticket items, like homes and cars, are the first to note a change in consumer attitudes.
How can most economists say with such certainty that 2020 is the likely year for the next U.S. recession? One answer lies in the yield spread, which reflects both bond market expectations and interest rate movement, as spurred on by the Federal Reserve (the Fed).
The yield spread consistently predicts a recession one year forward each time it inverts, or dips below zero. In 2018, this figure is steadily approaching zero and for the first time since 2007 is below one. At its current trend, the yield spread will likely invert around mid-2019, with a recession to arrive one year later.
Of course, there are complicating factors that may swing the recession to arrive a few months earlier or later than the yield spread suggests. For instance, current global trade tensions have tightened growth expectations among businesses and investors, causing a recent dip in the stock market (though market operators are suggesting rising interest rates alone are responsible for the damage).
A follow-on factor is the massive corporate borrowing at cheap rates funded by banks and junk bond investors. A stressed financial crisis situation comparable but not equal in amounts to the financial crisis of 2007 now exists. The meltdown of that corporate bond market will tell the story of the next recession’s duration, be it months or closer to a year.
What will happen during the next recession
Leading into, during and immediately following any recession, conditions transition to a buyer’s market, as buyer competition wanes and seller desperation rises. Most experts forecast the next buyer’s market will arrive in 2020, though it’s possible the seller’s market will hold until 2021.
When prices begin to dip, properties will begin to fall into negative equity status. Foreclosures and short sales will become common, worsening the problem of falling property values. Short-term investors bent on turning a flip — speculators — will return in rising, if not alarming, numbers.
Mortgage availability will suffer, as lenders become more cautious in padding their portfolios and dealing inarticulately with their rising inventory of real estate owned (REO) properties.
With lower home prices and fewer home sales, agent incomes will decrease. first tuesday forecasts a 20%-30% drop in agent fees in 2020, before improving in 2021. For those agents who don’t increase their production, some of this income drop will begin in 2019 as buyers and sellers collectively sense a shift in the market.
Prepare now: overproduce
To prepare to survive in your agent career during the next recession, first calculate how much money you’ll likely need to make and set aside in the coming year.
Assuming your income will decrease 25% in 2020, you will need to make an additional 25% of your income in 2018-2019 to make up the difference — if you plan on maintaining the same standard of living. For an agent currently making $6,000 a month, they will need to increase their income to $7,500 a month. This means they need to gain another transaction each month, shift their practice into higher-priced homes, or make up the difference with real estate related odd jobs. These might include relocations, referrals, exchanges or simply managing property.
Re-visit your business plan to gain a better picture of how you might best boost your earnings today. One way you can increase your transaction volume is to increase your marketing efforts, including:
- expanding your FARM to additional neighborhoods and demographics;
- increasing your delivery frequency of marketing materials — you’ll likely have more time for the effort; and
- aggressively marketing your real estate website — or building one if you don’t already have a website, a situation listing aggregators like Zillow and Trulia have made center stage for buyers.
Editor’s note — Do you still need to build your professional website? Visit www.squarespace.com and use the code FIRSTTUESDAY for 10% off.
Agents looking to keep ahead as the market slips will focus on building out their power base. The purpose of an agent’s power base is to expand their network, and ultimately their clientele through branding and bonding. An agent’s power base is the sum of their assessable achievements, including:
- civic engagement;
- longevity (family roots and name recognition in the community);
- wealth; and
- notable personal accomplishments.
It’s all about expanding your network to reach others in a meaningful way. Become friends with lawyers, accountants, building contractors, private lenders, mortgage originators (MLOs), bank mortgage servicing managers (those in the REO department), commercial property escrow officers and others who will remain active and viable during the uncertain times of economic recession. Find opportunities to work together and hold each other accountable to commitments. Recessions clear up questions about who has the mentality to survive and who does not.
Editor’s note — To read more about expanding your power base, marketing your brand and best professional practices, download your free Career Manual here.
Prepare now: Become a Broker
Another way to increase your income as an active agent is to become a broker.
Agents eligible to achieve a broker’s license include those who have two years of full-time experience as a licensed agent within the past five years. Agents may petition the California Department of Real Estate (DRE) to count other real estate related experience towards the two-year requirement, such as experience as an appraiser or property manager.
It typically takes around six months from enrolling in broker licensing courses to passing the state exam. So begin the process in 2018 to ensure you are positioned to either negotiate with your broker for a better fee split as a broker-associate or go independent and establish your own brokerage operation before the recession arrives in 2020.
Agents unable to meet the requirements to become a broker might well approach their employing broker and begin negotiations for a better fee split. This is best done when your transaction volume is above average, as it shows your worth as their agent.
Read about the full requirements and the process to become a broker here.
Actions to take during the recession
The most important thing to remember in the coming years is that a recession is full of just as many opportunities as a housing boom — you might just need to look in different places to find them. Recessions allow the determined to push forward. Here are some steps to take during the coming recession:
- Consider purchasing property by bringing together investors to take advantage of the low price points expected during the recession. You do this by personally entering into a purchase agreement to buy a property you select for acquisition, then soliciting investors to collectively contribute funds and credit to buy the property, and form a limited liability company (LLC) to complete the purchase. A recession is the ideal time to be an agent or broker conducting business as a real estate syndicator purchasing income-producing investment property at the bottom of the market. [See Realtipedia volume: Forming Real Estate Syndicates]
- You may also consider branching out into property management, one of the few recession-proof real estate jobs.
- During the recession, shift the focus of your marketing efforts to homebuyers and investors rather than sellers. Chase expired listings not for a listing, but for the possibility of purchasing the property on behalf of a buyer – submitting offers to buy, not offers to list. During the slower sales of the recessionary period, time previously spent on managing listings is best spent locating and cultivating acquaintances with potential buyers as new clients. This, as an aspect of estate building, will serve you well during and after the recession.
- Consider becoming a foreclosure or short sale specialist, then market yourself as having the expertise. Study the California rules protecting homeowners during the foreclosure process, the tax impacts of completing a foreclosure or short sale and the tricky negotiations for discounts with mortgage lenders on negative equity properties. Offer your services as an informed expert to homeowners and homebuyers alike. [See Realtipedia volume: Buying Homes in Foreclosure]
- The reduced mortgage availability during the recession, along with higher interest rates, are easily turned into deal-making opportunities through your study of creative real estate arrangements, including carryback or “owner will carry” financing. Knowledge of these tight mortgage market financing arrangements will help your sellers’ properties stand out from the growing number of listings. [See Realtipedia volume: Creating Carryback Financing]
- Learn the rules for §1031 exchanges, which allow owners to sell their property and defer the taxes on the profit (or loss) when they use the sales proceeds to purchase like-kind property. [See: The §1031 investment plan, explained]
Investors make up a larger portion of real estate players during any recession and recovery, and the same will be true for 2020 and the years following.