Market Timing and the Sacramento Market
In the stock market, there’s an age old debate between folks who believe in buying a good value stock and holding it for the long term (as exemplified by Berkshire Hathaway’s Warren Buffet), and those who believe they can somehow predict the peaks and valleys of the market to take advantage of the opportunities of correct “market timing”.
Obviously if the market timers are right — that they can correctly predict peaks and valleys — there’s huge money to be made. The problem, of course, is that they can’t.
(No doubt somewhere, somehow, a day trader is reading this and disgruntling even as we speak).
In real estate, we often find buyers and sellers doing a similar sort of mental arithmetic in an effort to decide whether to act or wait.
Right now we find buyers who are waiting for the prices to come down a little more, and sellers are hoping that the market will pick up more (i.e., that the buyers will stop waiting).
One of the things I always tell home buyers about waiting is that (unfortunately), the best way for prices to go down is for interest to go up. Of course, until I ran my recent handy spreadsheet, I was advising buyers of this based on reading and the like. The numbers for Sacramento for the last year show how prices and interest move roughly in tandem (in the opposite direction, of course).
Here are the charts of average sold home prices in Sacramento and average 30-year fixed mortgage rates for the last 12 months:
Prices reached their high point in August, just two months after interest had reached a low. As interest climbed in October and November, prices were falling. A buyer who might have waited from Septemeber to December and who could have financed 100% with a 30 year fixed loan would have found that they saved $6,633 on average on the home, but that (again on average), they ended up paying $18,738 more over the life of the loan because of the higher interest rate. To be sure, this example is a bit contrived, and doesn’t account for taxes and insurance, but it does point up a particular problem of market timing when it comes to real estate: the best way for prices to come down is for interest to go up, so you may not end up better off in the long run.
