Wall Street Your Real Estate- Post #6
The Crystal Ball Rule
This month in Wall Street Your Real Estate we’re tackling Rule #4 Don’t Try To Time The Market And Plan Your Exit. This is also known as The Crystal Ball rule. Before we get started, if you’re a design, décor or renovation junkie, you won’t want to miss our new 1898 House Home Renovation Blog Series. The entire series of both blogs is on the Noble LaCouture blog page here. Okay, now we’re back from that commercial break.
The questions we get the most often in real estate are, “is the market overheated? Is the market going to go up? Is it going to go down? Where do you think the market is headed? Would you buy in this market?” We do wish we had a crystal ball that actually worked but ours is glitchy so we have a firm policy of not predicting the future when we can avoid it. Even with all the data in the world, the real estate market is frustratingly unpredictable. It used to be that we could rely on the real estate cycle lasting about 15 years, but recent events in the market have completely upended that timeline. We also saw people moving into cities then out of cities in a cyclical pattern and that may repeat or it might not. The work from home shift could permanently derail that somewhat predictable cycle as well. In the past, rising interest rates and the tail end of an active construction boom signaled a market slowdown, but that may not be the case now as geographic and demographic shifts occur. No matter how much you study markets, it’s nearly impossible to predict whether you’re buying at the bottom or selling at the peak. We don’t think that should be your main focus or even a side focus.
This leads us to Rule #4: Don’t Try To Time The Market And Plan Your Exit. We have had a few customers lose out on great properties because they were convinced they could get a better deal or they wanted to wait for the market to cool off. Customers have left millions on the table and they’re still waiting. It may be that in four to five years, they’ll be feeling smug and get a deal but we can’t know that for sure. In the meantime, they’re getting older, losing out on income from their property, and losing out on equity. We think there’s a better approach.
Instead of consulting your crystal ball, we think you should only buy if you believe you can hold without being forced to sell in a market downturn for financial or emotional reasons. Make sure to carefully examine worst case scenario financially in light of the property fundamentals – income, expenses, vacancy rates and all of the due diligence we covered in Blog Post 4. If that looks acceptable, then determine if you have the patience and temperament to hold onto the property through a market downturn without beating yourself up daily and without having extreme marital or family strife. If you or anyone affected by the purchase is the kind of person who wants to dump stock when it’s crashing or gets extremely nervous about stock market fluctuations, you can still buy in any market. In that case, instead of buying a speculative property which may suffer extremes from market volatility like a tech stock, buy more of a blue chip property that’s firmly within or below your budget. We discussed these types of properties in Blog Post #2. If the numbers, due diligence, and emotional aspects look good and you’re ready to buy, then we don’t see why you wouldn’t find a great property and buy it. It may take extra time and effort in a hot market, so get a seasoned local agent who knows of off market opportunities or who has success in bidding wars.
Timing the market is almost meaningless if you’re buying and selling in the same market. If you’re buying and selling in a similar region at similar times, it’s a wash. This means that if it’s a hot market you’re going to sell for more and you’ll likely buy for more. Ditto for a weak market. You may be selling for a lower price than expected but you’ll also be more likely to pick up a deal.
If you aren’t planning to buy and sell in the same market, then it makes sense to look more closely at market conditions. If you have the chance to sell in a hot market, and can buy in an up and coming market that’s not as overheated, that may be a good strategy but you still can’t predict what any market will do. You’ll know if it’s a hot market by the average days on market, whether properties are getting multiple offers, if there is limited inventory, and if agents have waitlists of buyers. In the greater Park City area, all of those things are true. Sales volume is high which means a lot of properties are coming on the market, but demand is outpacing supply which means that the market is a competitive and hot seller’s market. We know people are leery of agents but a full time seasoned agent with a good reputation can help you learn about their market in minutes. If you don’t know of any agents in the market you’d like to know about, reach out to us or your favorite agent for help. When agents refer others they usually make sure to only select a good agent and stay on top of them.
If you’re considering selling, timing the market isn’t really your friend either. You would think it would be amazing to sell at the absolute peak of the market and you would be partially correct. This is the type of market where you’ll get top dollar for your home but you could end up in the stressful position of needing to move out quickly and having nowhere to go. If you need to sell in a hot market, make sure you carefully think through your ability to find permanent, long term housing. Hot markets can rise even higher so if you plan to rent for a year or two, you could be priced out of the market later. At the peak of any market, it’s hard to find places to buy and most sellers won’t allow for contingencies in their contracts. It’s actually easier to sell in a balanced market. This is a less active market where supply and demand are balanced. It means you have more time to find a new home and buyers may be open to letting you buy their home if you sell yours. It can feel great to sell at the peak, but if you’re also buying at the peak, it’s irrelevant and can cause undue stress. When you’re selling, do what works best for you and your family and don’t get whipsawed around by market conditions.
With any property in any type of market, it’s advisable to consider your financial goals and exit strategy in light of those goals. Venture capitalists have a term called a planned liquidity event. This means when something in the portfolio hits a certain target, they sell it. Your real estate should be similar. You can make plans to sell it at a certain time in your life or at a certain price or both. Either way, you want to understand your end goals for the property so you can manage it accordingly. This approach can help you create a realistic timeframe and budget for improvements, renovations and major capital expenditures. It can also take the stress out of property ownership by giving you permission to be patient and stick to a plan.
We think it would be amazing if everyone could time the market and predict the future. In the absence of that, it’s critical to have a solid, well planned exit strategy and the financial and emotional ability to withstand market storms. It’s helpful to know what kind of market you’re buying or selling in so you can understand the level of aggressiveness you need in your approach, but market conditions should never be a controlling factor holding you back from buying or selling.
Next month we’ll continue this theme with Rule #5: Take a Disciplined Investment Approach.