You Don’t Have to Buy at the Bottom to Make Money

Timing financial markets, including the real estate market, is always tricky business. There are dozens of variables that have direct influence over the real estate market, including interest rates, buyer demand, population growth, economic factors, inventory levels, new home construction, changes in personal income, and job growth to name a few. It is the interplay of these variables that determine the strength of “the market” and determine price trends. Right now, there has been a lot of turmoil and volatility in the financial markets, as well as negative news about the real estate market both nationally and regionally. This has contributed to the downward pressure on the local real estate market.

I hear a lot of buyers say “I’m going to wait for the market to bottom out before I buy”. As a result, there is tremendous pent up-demand for housing in our area. All we need is for some definitive news that we have hit “the bottom” and there will be strong activity in the market. But finding “the bottom” is often harder than it seems. Unfortunately, there is no magic formula to alert us when we have hit “the bottom”. At that point, we are wondering “Is this the true bottom, or is it just a pause in the downward trend?”. The only way to know will be to wait and see, and if the market did in fact hit the bottom, and starts to trend up you will have missed it. In fact, the only way to know that you have hit “the bottom” is when you are well into the recovery.

Take a look at the above illustration. Everyone wants to buy at point “B”, which is the bottom. But actually buying there is more of a matter of luck than anything else, since at that point in time the market still seems to be going down. The reality is that most buyers who are waiting for “the bottom” end up buying at point “C”, which is well past the bottom. At this point, there are clear indications that the bottom has been hit. But due to pent-up demand from all the other buyers waiting for “the bottom”, the market has actually rebounded a little and is starting to trend up. In reality, you are better off buying at point “A” than point “C”, even though prices are still coming down. Why? Because if you buy at point “A”, you have several advantages:

* You have little or no competition for the house you want. Thus, you are in a better position to get a better price.

* You have the luxury of choice, and can find a home in a prime neighborhood that in normal market conditions would sell immediately, perhaps before you even had a chance to view it.

* Depending on the situation, you have less pressure to rush through inspections and gloss over potential issues with the property. You will have time to evaluate the condition and address any concerns you have. And the seller is much more likely to accommodate you if any property issues need correction.

If you buy at point “C”, you have missed the market. At that point, you are in a weaker position because:

* You have competition from other buyers who were waiting for “the bottom”. You will likely pay more for the house because of it.

* You have less choice in available homes as the market heats up. And prime properties in the best neighborhoods will sell quickly, sometimes with multiple offers

* You will be more inclined to make concessions on the condition of the home, as you will be under pressure from other potential buyers

* The seller also knows that we have hit “the bottom”, and is expecting prices to rise. This will raise their expectations, as well as the price they are willing to now accept

The fact is Real Estate is a long term proposition. If you are planning on staying in your house for 5 years or so, it is not crucial that you find the bottom of the market. I purchased my last 2 homes at the “top” of the market each time (in June of 1989, and July of 2000). And both houses have at least doubled in value, even if they declined in value after I purchased them. If you are a believer in market timing, I overpaid for both houses. And it is the best thing I ever did. In the long run, local real estate is very desirable, and given the long term growth in area population, job growth, and future restrictions on housing development, real estate will be in demand. So if you want to buy a home or move up into a larger home, now is a great time to do so, even if prices are still trending downward. Do it now before we hit “the bottom”, and you will be better off in the long run.