Renting may not be a long-term solution for someone who just retired, she says, but given that the client hoped to move anyway, it's a step toward her goal of being free to relocate.

Delaying Common Sense To Invest Everything In Real Estate
    Even if your client's residential property values are intact, that's still not reason to assume he'll be OK.

Michael Kothakota's client retired two years ago and began to invest in real estate. "He decided that my tired old asset allocation strategies weren't going to help him," says Kothakota, an advisor with Edward Jones in Raleigh, N.C. "This 56-year-old withdrew his entire $1.2 million portfolio to invest in several markets, including Las Vegas, Phoenix and Jacksonville, Fla., spending much of his savings traveling to those places to 'do deals.'"

Trying to look out for his client, Kothakota fought him tooth and nail until finally the client fired him, calling him a hack. "Now he's out of money, will need to go back to work soon, and he's back asking me for strategies to recoup his lost assets. Other than him, I've managed to keep my clients above water with appropriate asset allocation strategies."

Dare we say it-there's at least one in every practice. And Chuck Rylant of C.J. Rylant Wealth Management in Santa Maria, Calif., has his, too. "Our most recent client came to us because all of his net worth was in rental properties in Bakersfield. For the past few years he has been pouring all of his savings into rentals hoping to create a fortune. One of his properties that two years ago appraised at $570,000 recently sold for $345,000. He was able to purchase this home with only 3% down and was similarly over-leveraged in all of his properties-plus, he had not diversified outside of real estate."     When property values declined, says Rylant, the client was forced to sell many of these homes because he didn't have enough cash flow to keep up with the mortgages.

Fortunately, most of Rylant's clients are between the ages of 35 and 50, so the "consolidation" of California's real estate markets shouldn't derail their long-term plans. "But these recent events do affect them emotionally," says Rylant. "We've recently attracted to the practice some clients who were previously 'do it yourselfers' as well as a couple of new clients who were simply frightened of [this economic environment]."

Delaying Panic By Making Small Adjustments

Donald Cummings of Chicago-based Blue Haven Capital sees discomfort even in clients who probably needn't worry about the effects of declining housing prices on their overall financial picture.

"We recently had a client express some concern that his home's value had dropped from $1.6 million to around the $1.2 million area. His concern was that if he needed to sell, the $400,000 that he would not receive might adversely affect his long-term income generation. Mathematically, I don't think it would have made a big difference, but we raised his portfolio targets to a 63% stock and 37% bond allocation from 60% and 40%. The rebalancing served a psychological purpose to calm him down a bit."

The net long-term result of the recent housing price dip is probably zero for this client, says Cummings. But what his experience points out is that, while the housing market fall is affecting some clients in a very real, quantitative way, it's affecting others in primarily an emotional way. Clients need not only to be solvent, but also to feel solvent, too.

Some observers argue that baby boomers-the demographic group now entering retirement-are less likely than earlier generations to have worked with an independent financial advisor (if only because they're just now beginning to receive inheritances, business sale proceeds, etc.) and more likely to seek advice from name-brand providers, like wirehouses. This poses an additional problem because, in an environment where products must be sold so that brokers can make a living, many of these new clients will be encouraged to tap into home equity for reasons that may or may not benefit them. In other words, the "sanctity" of home equity-the refrain of advisors like Sestina and Holland-will be viewed in ways that may lead to more panic down the road.

But if all else fails, maybe you could try this approach (imprudent as it may seem):  Charles Stanley of Capital Financial Advisors LLC in San Diego, reports, "An insurance salesman friend of mine panicked recently when he lost value in the residence he'd been viewing as his retirement nest egg to be sold in two to three years. Planning to use a major portion of the proceeds to fund an immediate annuity, his house value is now insufficient to purchase that annuity. Having recently been introduced to a new version of life settlements, he instead took a settlement on one of his life insurance policies and purchased another life policy on which he'll take a life settlement after he has owned it for two years."