This morning I received an e-mail from George, an investor in Canada who is looking to purchase a home in Westbrook Village. George only would live in the property for a couple months of the year and otherwise would use it as a seasonal rental.
In short, George has decided to wait “until the market shakes out” before he buys, which makes sense. Except that he also says is looking to invest for the long-term. And with a long-term investment, the entry point is somewhat (note: somewhat) less important than entering in general.
It’s been proven that market timing doesn’t work. Studies in the stock market have proven that those who attempt to time the market – buying at the bottom, selling at the top – perform no better than those who purchase over time.
Real estate, while similarly an investment, behaves differently than stocks for a number of reasons – price and market liquidity to name two. Yet the idea of market timing or, more to the point, the futility of attempting to time the market is the same.
Take a look at the diagram below and tell me where the bottom of the curve will be:
You can’t say for certain, can you? You can extrapolate based off the current data, you can make an educated guess, you can throw a dart at the picture (hopefully a print and not your actual monitor) but you don’t know where the bottom is.
In fact the only way to know when the market has reached bottom is …
… when it’s on its way back up and the curve has completed. So buying at the absolute bottom is little more than dumb luck.
Whether you purchase at Point 1 or at Point 2, the net result is you’re spending the same amount for the house. Yes, if you finance the home you’ll be paying interest in the interim. But the price is exactly the same now as it will be then.
Yet there are other differences between the two points:
- Market mechanics dictate price: high supply and low demand results in falling prices, while low supply and high demand causes prices to rise. On the downslope, such as we are in now, there’s far more inventory to choose from than there will be on the upslope.
- Sellers generally understand the state of the market: Is it more likely that a seller will be amenable to an offer 5 – 10% below list price when prices are declining or when prices are rising? For the same price, it’s possible to purchase more house now than it will be in the future.
- Interest rate uncertainty: The Fed’s currently in the mood to cut rates. It wasn’t so long ago that rates were on the rise. Again, this only impacts you if your financing but there’s risk inherent in waiting on the unknown.
If you’re looking to speculate in real estate, this certainly isn’t the type of environment in which to do it. But if you’re looking to invest for the long-term, does it make more sense to wait until there is more demand and less chance of a bargain or to purchase when there are deals waiting for those who make the offer?
[tags]real estate investing, Westbrook Village, Phoenix real estate[/tags]