I have previously written that home builders and contractors need to keep more money in emergency savings than most professionals do. Several realtors and real estate agents have since contacted me to point out that they also have to keep extra money in emergency savings due to seasonal and cyclical sales fluctuations. They are absolutely correct.
Financial planning professionals have a tendency to recommend a rule-of-thumb for the amount of emergency savings that a family should keep. This rule states that a single person or dual income family should keep enough money in emergency reserves to cover 3 months of expenses. If the family has a single income, that amount should be increased to cover 6 months of expenses. Although this rule-of-thumb may be appropriate for many individuals with stable and salaried jobs, it is woefully inadequate for real estate professionals.
Realtors should be fully aware that their industry experiences seasonal fluctuations in revenue. The above graph showing existing home sales per month for the prior year illustrates that. Realtors should accelerate their savings during periods of higher sales to pad their emergency funds in order to maintain their lifestyle during slower sales months. Because of the nature of seasonal fluctuations, many realtors that I have worked with and interviewed have found that saving enough to cover 6 months of living expenses provides a comfortable emergency reserve to weather periods of decreased revenue. This amount could vary depending on level of lifestyle.
In addition to seasonal fluctuations, realtors must also contend with cyclical fluctuations in revenue. August 9th marked the 10-year anniversary of the beginning of the global financial crisis. The realtors that were fortunate enough to survive the financial crisis acutely remember the trauma of going several years with severely diminished income.
It is difficult to plan for cyclical crashes in the real estate market. Sales declines can last multiple years so it is difficult to come up with a reliable formula for the amount of money to keep in emergency savings. Of the realtors I have worked with that survived the financial crisis, most felt the need to save enough to cover a year’s worth of living expenses. Even then, surviving a cyclical decline may require a decrease in lifestyle spending and assumes that some amount of revenue is still coming in. If a realtor expects to maintain their current standard of living through a crisis, they will likely need to save even more.
It is also essential to keep the emergency savings in cash or cash-like instruments at a financial institution. The above graph shows the percent change from previous year for new single-family homes sold vs. the Wilshire 5000 Total Stock Market Index. There is a solid trend where the stock market decreases along with sharp decreases in home sales. If a realtor’s emergency funds were invested in the stock market, there is a strong possibility that its value could be severely diminished at a time when the realtor needs access to the funds.