How to avoid the next real estate downturn

Frans and Caroline Swaalf, management consultants in the Netherlands, have been enamored with South Florida since they were graduate students at the University of Miami in the 1990s.

When the housing crisis hit in 2007, they thought their time to buy had come. They bought a condo in the Fontainebleau, a resort in Miami Beach, in 2010, after prices had bottomed out, paying 60 percent less than it had sold for two years earlier. The condo has since doubled in value.

The Swaalfs began investing in other properties. In 2011, they bought a small condo in an Art Deco building and doubled their money when they sold it six years later. They put that money into a larger condo in Miami that overlooked the water, and then looked for a buyer. But Frans Swaalf expects to make only 5 to 10 percent when the sale closes.

That was a signal to the couple that the market was slowing and that it was time to put their investment gains elsewhere. Prices in the Miami area have cooled since September, according to Trulia, a real estate search engine.

Real estate investments, whether residential or commercial, have long been associated with wealth creation in the United States. The 2007 housing crash put a damper on that; the market lost about a quarter of its value over two years. Housing has since stabilized, although sales have been sluggish in the face of rising interest rates.

In a recession, though, the value of real estate — a mix of the home’s or building’s value and its location — becomes harder to discern. An investment can become illiquid when the market drops as the number of buyers dries up, and sellers have to learn to be patient to avoid taking a loss.

“Real estate has a good track record,” said Peter Heilbron, senior investment officer at Northern Trust. “But we...