From a reader: “The market has gotten VERY HOT this year and we are starting to wonder if the bubble is back…this time encouraged by zero inventory, a handful of IPOs and a great deal of foreign investors worried about the stability of the economy in their home country. Seems like a great time to sell but would you advise waiting for a market correction to buy?”
Reader asked this question just over three years ago, in May 2014. Here’s some history on home prices over the past five years, in the areas my newsletter covers.
Yep, it was a bubble.
Now, I’m not picking on Reader. Reader isn’t the first to try to outguess Silicon Valley real estate. She won’t be the last.
Over the years I’ve found that market timers always have good sound reasons, based purely on objective economic criteria, for thinking a bubble is just around the corner, although often those reasons can be distilled into one: “I know this market better than the people bidding up the prices of homes”.
But no one knows what real estate–or any market–is going to do tomorrow, let alone a month or a year from now. Especially a market with as many moving parts as Silicon Valley real estate.
That’s one big problem with second-guessing our real estate market. Here are four more.
First, it’s a classic example of over-thinking. People buy a home when they’re emotionally ready to commit–to an area, to homeownership. “I’m waiting for a market correction” says they aren’t. It says their driver is “I should”, not “I want to”, and “I should” is never enough. “I should” is an external voice: society, parents, friends, maybe an investment guru or a home flipping show. “I want” is an authentic inner voice.
Delaying a purchase may turn out to be a lucky decision (or non-decision) for a market timer. Then again, it may not (see chart, above). Because nine times out of ten, you beat the Silicon Valley real estate market, not by timing it, but by joining it.
The second problem with “I’m waiting for a market correction” as a buying strategy is that it’s a classic example of under-thinking: it’s far too vague. It has no trigger point–no date, or set of conditions, at which buyer is committed to doing something–which may be its appeal: it defers action to some indeterminate point in the future. The can has been kicked down the road.
Market timers need to ask themselves when the correction will occur. Will it be tomorrow? Three years from now? Are you absolutely positively sure?
Are you willing to wait that long? Will your life agenda let you wait that long? Do you understand the potential risk of waiting? (See chart, above.) Because it’s an under-appreciated fact that inaction carries as much risk as action.
Third, market timers need to ask themselves how much of a correction they’re waiting for. 5 percent? 15 percent? 50 percent? What will drive that correction? And if a 5, 15 or 50 percent correction occurs, are you absolutely positively sure you’ll pull the trigger then? Are you absolutely positively sure that you’ll buy when the economy is tanking, people are losing their jobs, and everyone is saying it’s a lousy time to buy?
And if you’re really a contrarian, will you buy then, or be tempted to wait j-u-s-t a little longer, in case there’s more correction left? After all, the whole point of waiting months or years is so you don’t pay too much, right? Wouldn’t it be terrible if you bought before prices bottomed?
Here’s the final problem with market timing: anyone who was around and paying attention in 2012 knows that when you do pull the trigger, you won’t be alone. You won’t sneak into the market and steal the low-hanging fruit before your competition notices.
Market recoveries are huge social events driven by mass consumer sentiment. Most people will have been watching the same market indicators you were, or, far more likely, just waiting for their gut to tell them that they’ve deferred their life long enough and now it’s safe to buy.
2012 was like that. 2002 was like that. January 2017 was like that. Boom! Buyer’s market yesterday. Seller’s market today.
I suspect that there’s at least one reader who now knows that “bubble” is the most over-used word in our language. And one of the most expensive.
copyright © John Fyten 2017