Why timing the real estate market rarely works
Most seasoned investors will tell you that, overall, investing in the real estate market is a good idea. Properties represent real assets that have practical, functional value, and historical data indicates that real estate has one of the most consistent rates of growth of any asset class. With the right purchases, proper management, and enough patience, even an amateur can turn a significant profit.
However, you can’t effectively time your real estate buying and selling decisions the same way you can with other types of investments. In spite of your intuitions—and potentially some advice you’ve received in the past—it’s incredibly difficult to time the real estate market effectively.
But why is this the case and what can you do about it?
THE IDEA BEHIND TIMING THE REAL ESTATE MARKET
The idea behind timing the real estate market is pretty simple. As most people understand, the real estate market operates in cycles of booms and busts. In other words, prices fluctuate up and down based on a variety of economic factors.
In a buyer’s market, there is usually a surplus of inventory, resulting in lower prices and more available options. A seller’s market, on the other hand, is characterized by a dearth of inventory, resulting in higher prices and fewer available options. If an investor can find a way to buy at the bottom of a buyer’s market and sell at the top of a seller’s market, then they can reap an incredible profit.
But there are several problems with this idea.
PROBLEMS WITH TIMING THE REAL ESTATE MARKET
The real estate market is perhaps even more complicated than most real estate investors would like to admit. Housing prices aren’t merely a byproduct of available inventory. They also depend on broader economic factors, mortgage interest rates, loan availability, incomes, and prospects for the future. And even with all the data in front of you, you may notice trends and patterns in pricing changes that seem to be influenced by variables you can’t identify.
Because of this, the real estate market is notoriously unpredictable. We can generally predict that housing prices will rise over time because that’s how they’ve historically developed. But from year to year, and decade to decade, even our best real estate experts and economists are forced to shrug their shoulders. People were claiming a real estate bubble was about to burst as we entered the COVID-19 pandemic, yet housing prices exploded. Real estate optimists were equally blown away by the 2008 housing market crash. If even our best experts can’t predict how real estate will develop in the immediate future, then the average person has little hope of accomplishing the same feat.
Local conditions and variables have a lot to do with this. It’s very difficult to analyze the real estate market at a high level because so many of our real estate fluctuations are attributable to local conditions. It may be a seller’s market overall, but that doesn’t mean you can’t find local neighborhoods with amazing buying opportunities—if you know where to look.
Adopting the mentality that you’re going to time the market sets you up for failure, since it conditions you to make emotional and impulsive decisions. Instead of following an objective, grounded strategy, you’ll be scrambling to make purchases or sales in response to what you think is a peak condition.
Real estate moguls with millions of dollars in capital may be in a position to take greater advantage of real estate market fluctuations, buying properties quickly and in cash. But for the average investor, with limited available capital and liquid investments, it’s tough to turn on a dime. Housing prices may plummet, but that doesn’t mean you’ll be able to take advantage of all the buying opportunities that present themselves.
STRATEGIES TO MITIGATE TIMING-RELATED RISKS
I maintain that real estate is a solid investment, despite the difficulties in timing your purchases and sales. So what strategies can you utilize to mitigate timing-related risks?
One option is to invest in real estate investment trusts (REITs), which grant you exposure to a range of different assets in the real estate world. Even better, REITs make it easy to utilize dollar cost averaging (DCA), so you can invest a little at a time and avoid the major booms and busts of the industry.
Alternatively, you can simulate dollar cost averaging by committing to acquiring new properties at steady intervals, regardless of local market conditions. You can shift your timing slightly to avoid bad conditions or take advantage of good ones, but if you remain consistent, you’ll remain practically immune to the effects of wild fluctuations.
Finally, instead of perfecting your timing, work on perfecting your location scouting. I think choosing the right location for your investments is far more important than buying at the perfect time. That’s because there are always cities with promising buying opportunities, even in conditions that favor sellers.
Real estate remains one of the most popular types of investments, and for good reason. It’s a great way to balance your portfolio, and if it keeps performing in the future the way it has in the past, then it could set you up for massive profitability. But try to avoid the temptation to attempt timing the market—it’s far too difficult, and you’re almost always better off following a pragmatic strategy instead.
Ty Foster is a Managing Director at Invest.net. An experienced investment professional, Ty resides in Salt Lake City, UT.