Last week we talked about the Market and how it is smarter than you (and everyone really). We covered off 3 scenarios to help you understand how the market works. If you missed it and want to catch up just click on the link.
This week we are going to talk about what happens when you try to Time the Market.
Article By: Neil O’Donnell
Timing the Real Estate Market:
Nobody has a crystal ball – and it’s almost impossible to ‘time the market’. Here are two scenarios we repeatedly see:
Scenario #1 Waiting to Buy Until the Crash
Every year we run into Buyers who’ve decided to postpone their search ‘until the real estate crash’ so they’ll be able to buy a house “for cheap”. There are at least 3 problems with this line of thinking:
First Problem…How will you know when you’ve reached ‘the bottom’ of the market? The thing about ‘the bottom’ is that we only know it was the bottom once things have improved and we aren’t at the bottom anymore.
Second Problem…If it was really that easy to time the market, wouldn’t everyone be millionaires? Wouldn’t we all have bought Microsoft, Apple or Google stock when they first went public?
Third Problem…While you’ve been waiting for the market to crash, house prices continue to increase. Lets look at the last 5 years: if you’ve been sitting on the sidelines you haven’t been able to benefit from the 47% increase in prices across the Southern ON. While you’ve been waiting, you’ve been paying someone else’s mortgage (your landlord) and you haven’t been building any equity. If prices decrease by 47%, (and that’s not going to happen) you’ll be paying the same as you would have 5 years ago – that’s not really buying on the cheap.
Scenario #2: Selling and Renting Until the Market Crashes and Re-buying When it Recovers
We often come across Sellers who want to sell while the market is high and lock in their returns. The plan is usually to rent in the meantime, wait for the crash, and get back into the property market when things recover.
Based on what we’ve already talked about I think you know where this is heading. Most of the Sellers who used this strategy in the last 5 years are now priced out of the market. The $308,000 they sold their detached house for in 2010 now only buys them a smallish condo – and to re-buy their same house, it would cost them $468,000 – 52% MORE. Ouch. Not only that but they’ve lost all the money they spent in rent.
Timing the market is not a game you should play with your primary residence. Remember this is also part of your retirement money. Do you really want to gamble with that?
Lesson #3: The “Below-Market” House
There’s no such thing as buying “below market value” in a hot or even balanced market…even if you really really really want to buy a below-market house. It doesn’t happen.
First…. If a house is under priced, the market will drive the price higher in a bidding war. Active Buyers and their agents jump on houses that have been underpriced and that house almost inevitably ends up selling at a higher price – that’s what is called…you know it…. market value.
Second…What a house sells for IS THE MARKET VALUE. If nobody wants to pay $600,000 for a house listed at $600,000, then that’s not the market value. If the only offer the Sellers get is for $550,000 and they decide to accept that offer, then that’s the market value. Just because it didn’t meet the Sellers’ expectations doesn’t mean it was a bargain or a deal or below market value- it’s just the value that the market was prepared to pay for it.
The real estate market, the stock market, or any market really is not controlled by Sellers, Buyers or real estate agents. But we can learn from it.
For a more in-depth discussion on these topics, go to: Request a FREE Copy of our latest book, “The Value-Driven Approach to Sell Real Estate: How to protect yourself from Real Estate Greed and bank extra profit by thinking like the great Warren Buffett.”