Timing the market in real estate

[Ready]

I know that trying to time the market in equities is generally thought of as being a bad strategy. But I’m wondering if this thinking also applies to real estate purchases.

I have some friends in their 20’s who are trying to buy their first home together. They have been looking at homes in the $500K range, which is the upper limit of what they can qualify for on a mortgage.

In our neighborhood (Southern California), $500K gets you an older two bedroom condo with about 1,000 square feet in a not really nice neighborhood. The problem is, every time a condo in this price range goes up for sale, they get a dozen offers, with at least a few significantly above the ask price.

Southern California was hit hard during the financial meltdown. The market began to crater in 2005 and continued a downward spiral through 2008. Since 2008 the market has been increasing nonstop. It’s now on a 13 year run.

My friends are concerned that if they don’t buy something they will be priced out of the market. But I know that real estate markets don’t go up forever. The question is, how long do you wait in times like this to try and buy a first home? It could be years before the next correction. And the correction could play out slowly over several years.

So does it make sense to just stay out until the market turns, or is this just as futile as timing the equities markets?

 

[ExFlyBoy5]

Let me look at my crystal ball here...

But yes, timing R/E is probably WORSE than trying to time equities.

 

[chassis]

For a principal dwelling you need to do what you need to do.

If children are in the picture, buying a home or condo has a lot of advantages for raising a family. If it’s just two adults, renting any property that fits the budget and other requirements will work.

Prices likely aren’t going down in the next 5 years. That’s what my crystal ball says. There are fundamental economic reasons that this is the case.

 

[flintnational]

It depends. We never considered the status of the market when we were purchasing homes to live in (We have to live somewhere). As a real estate investor, yes I did try to determine if I was buying at a reasonable price.

 

[twaddle]

Impossible to time, but just like the stock market, there are valuation metrics to tell you what kind of deal you're getting.

Nationally, price/rent isn't quite as bad as the last bubble peak.

 

[Ready]

Looking at rental prices right now, it’s much cheaper to rent than to buy a comparable home. That’s what I usually look at when trying to determine if pricing is reasonable.

You also have to consider how long you intend to live in the home. My friends are hoping to buy a small condo now and then upgrade to something bigger in a few years. I just don’t see that being a good strategy. It may work out, or we may have a correction in a few years. I think you have to be willing to live in the home long term or it’s just too risky.

 

[mh]

Looking at rental prices right now, it’s much cheaper to rent than to buy a comparable home. That’s what I usually look at when trying to determine if pricing is reasonable.

You also have to consider how long you intend to live in the home. My friends are hoping to buy a small condo now and then upgrade to something bigger in a few years. I just don’t see that being a good strategy. It may work out, or we may have a correction in a few years. I think you have to be willing to live in the home long term or it’s just too risky.

Small condos are going to probably be the most unpredictable as far as resale value also, unless it’s it’s in a unusually good complex and location.

 

[RetireBy90]

I know that past performance is not an indicator of the future, but in my lifetime real estate has never crashed like 2007-8. We purchased a home in 1991 when we moved to the area after prices peaked in 1989. We were able to get our home at about 10% discount to what the previous owner paid at the peak. So the peak to trough was a bit more than the 10%. It took about another 7-8 years to get appreciation above the original price.
I would say if you are buying in a tight market like today, you need to plan on several years to break even on price after expenses buying and selling.perhaps I’m naive but timing real estate seems easier than equities. I wouldn’t buy today. Just one opinion.

 

[W2R]

My thinking is as follows. Remember that on free message boards like this one, you get what you pay for and I have zero expertise in this.

For most of us:

(1) buying a primary home is a long term purchase, because we might keep that home for decades. It's not short term like day trading. And,

(2) because we actually live in the home, we are not usually entirely free to sell at the exact most perfect moment. Life happens.

Therefore, in the general scheme of things I personally don't think real estate is the best choice for market timing. I don't do market timing, but if I did, I'd stick to day trading.

Oh, in my caveats above I forgot to mention that a year ago I predicted housing prices would slump during the pandemic; I thought nobody would want to move into another house, for fear it might be contaminated with the virus. Boy was I wrong on that one!

 

[Finance Dave]

Don't try to time it...just base the decision on family needs.

I sometimes think about the people who were born and raised in a high-cost area (let's say San Francisco), bought a house, got a job, moved to a bigger house, got a better job, etc...through their careers...and now are sitting on a $4M "modest" home in San Fran.

If they are willing to relocate to somewhere low-cost, let's say Detroit or Houston or Iowa, they could spend $1M, have the house of their dreams, and have a fully funded retirement.

We are in a nearly opposite situation...we've grown up and lived in the Midwest. We are considering moving to the Carolinas...and even though housing is only about 15% higher down there...we may have to settle for smaller or "less" in some areas to maintain our FIRE lifestyle.

 

[Starsky]

My experience in timing real-estate in California has been that 99.9% of the time, buying now is better than buying later. Prices will almost always go up - unless the neighborhood is really going down. Trying to time a residential real estate purchase expecting a downturn is a total crap shoot and you may be waiting for an event that will never happen.

In So Cal, one of the best Real Estate timing events to make quick money is to buy the first phase of a new development. I have friends who will buy early and flip them without ever taking possession. The later Phases are always more expensive than the first one - in luxury developments the delta can be hundreds of thousands of dollars.

 

[Montecfo]

My view on purchasing housing depends on value compared to renting, and time horizon. To me housing is primarily shelter and lifestyle choice but has some secondary investment elements.

I bought a house in a rising market, sold 2 years later (due to relocation) and made good money. But would not expect that. This was NE Phoenix in mid 1990s.

I would want a 5 year window for home ownership. And of course, you do not have to "make money" for home ownership to make sense. If you break even or lose less than renting, you have probably enjoyed a better and more cost effective lifestyle.

 

[Fermion]

Curious, why don't people build a small home themselves in California? Is land super expensive or the permits are very high?

I mean if you could get a 4000 sq-ft lot for, say $250,000 and $50,000 in permits and $200,000 to build a small 2bd 1 bath?

 

[Ready]

I think COVID had a big impact on the housing market in Southern California. With more people either working from home or just spending much more time at home in quarantine, having a nice home has become more important than ever. So this makes me wonder, after we finish vaccinating the majority of the population, will this have any impact on housing demand?

 

[Ready]

Curious, why don't people build a small home themselves in California? Is land super expensive or the permits are very high?

I mean if you could get a 4000 sq-ft lot for, say $250,000 and $50,000 in permits and $200,000 to build a small 2bd 1 bath?

California is a very large state with prices all over the place depending on how close you want to live to a major urban area. In my neighborhood a 4,000 square foot lot would sell for between $1M-$2M depending on how close you are to the beach.

Even in the more remote areas most land is already owned by larger developers who are building tract homes in large quantities. It would be rare to find an existing parcel of land without a home already on it in an area that is considered desireable.

 

[Retireby45ish]

Along the same lines as the question about buying land…eventually it becomes cheaper to buy land (outside Califórnia in places where you can actually get it) and build. From what I’ve read and been able to put together, it seems that the price of lumber skyrocketing in there last year, as well as the time it takes to build enough houses for people is what is also fueling this housing craze. Eventually I would think lumber comes back down, and houses are built, to ease the pressure from lack of inventory? So price jumps subside at thr very least. That’s just my view on it all.

Of course different areas have niche needs or factors such as the inability to build in Cali as someone said cuz all the land is already owned by contractors.

 

[twaddle]

So this makes me wonder, after we finish vaccinating the majority of the population, will this have any impact on housing demand?

Don't know if it will impact demand, but I'd expect it to increase supply as mobility increases. We're just starting to see a bounce off the supply bottom (of about 3.5 months of inventory, vs 6 months pre-pandemic).

Now is a good time to be a seller.

 

[PoorOldCountryBoy]

Real estate you live in is an expense, not an investment. Don't buy if you don't need to. If you do need to, minimize your expense but always buy quality.

 

[fire53]

If one buys it as their primary residence, I would suggest going for it as long as it fits their budget and has some emergency funds. Here are some of my reasons:
1. Mortgage interest is at a record low and tax-deductible
2. SCAL RE is like the stock market, it will appreciate in the long run. The current price may go down in a year or two but in the long term, the price will increase (IMHO). Not much empty land available to build.
3. If the price goes down a lot, you can appeal to reduce your property tax. If the value appreciates a lot, your property tax can only increase 2% from the previous year (not the current market value). I have a rental value at 650K but I only pay property tax on ~270K value thanks to this law.
4. Currently, rentals are difficult to find. I list an SFH for rent a few months ago and get ~ 100 inquiries and a few even offers to pay 6 months rent in advance
5. You need a place to live regardless of the price go up or down. So why pay rent to someone else when you can buy and build your equity.
6. I have friends who bought at the peak in 2006/7 and now their house value is almost double (in ~2010, the value was half of what they paid)

If you are buying as a rental investment in this market, that would be a different story.

 

[Ready]

Our neighborhood is still down almost 20% from the peak in 2006. So if you bought a home in 2006, you are looking at it having depreciated 20% after holding it for 15 years. I can’t help but feel like we are at a similar point right now in Southern California. $500K for a dumpy 1,000 square foot condo in a run down neighborhood seems absolutely ridiculous.

 

[chassis]

Curious, why don't people build a small home themselves in California? Is land super expensive or the permits are very high?

I mean if you could get a 4000 sq-ft lot for, say $250,000 and $50,000 in permits and $200,000 to build a small 2bd 1 bath?

Residential construction is smoking hot in this country, also. So there doesn't seem to be a reprieve from high acquisition costs, if the buyer needs/wants to be in or near a developed area with schools, shopping, access to freeways, etc.

Builders and contractors are busy/booked, lumber is expensive, and cabinets and appliances have supply chain disruptions. It's a tight market for all of these things right now.

 

[Another Reader]

Residential construction is smoking hot in this country, also. So there doesn't seem to be a reprieve from high acquisition costs, if the buyer needs/wants to be in or near a developed area with schools, shopping, access to freeways, etc.

Builders and contractors are busy/booked, lumber is expensive, and cabinets and appliances have supply chain disruptions. It's a tight market for all of these things right now.

It's those damn millenials... Lots of them and hitting their prime homebuying years.