Timing the Market: Is there a method to the madness?

Timing the Market: Is there a method to the madness?

An extended rise in real estate prices in almost every region of the country has invited an unprecedented transfer of investment capital out of the stock market and into the housing market. But many analysts foresee a cooling of the boom, and higher interest rates support that prediction. Real estate buyers and sellers are looking for ways to time the market, and the ones with professional experience are doing it by the numbers, not the emotions.

Interest rates for mortgages and other real estate loans are closely related to the overall performance of the real estate market, because those rates control the purse strings of the funds used to purchase property. Historically, any rates below 10 percent are reason to celebrate. But this comes are news to younger investors who have never seen double digit rates, and consider them a sign of the end of the world as they know it. They have enjoyed rates half that expensive for most of their adult lives, and as a result, have become accustomed to stratospheric housing prices that have doubled the average price of a single family home.

And because we live in a time when telecommunications tools have created a faster and more volatile global marketplace, the old rules of the lending game may no longer apply. What was once “historically” true may now be outmoded, outdated history – and unable to assist us in timing today’s markets. But there are some classic tips for analyzing real estate trends that still serve us well, in both bull and bear markets, and we can examine a couple of those in order to help you navigate the changing tide of the next wave.

One phenomenon that holds true when rates rise is that it often spurs sales of homes, contrary to conventional wisdom. The reason is that buyers who have been sitting on the proverbial fence, watching rates slide and trying to decide when to lock in their best (i.e., lowest) rate, suddenly panic when the numbers reverse and head upward. Rather than sitting by and idly watch interest rates climb beyond their reach, they jump in and buy without hesitation. This often brings a flock of reluctant buyers out of the woodwork, and can be a pleasing reaction to otherwise troubling news of inflationary rates. But the phenomenon is somewhat misleading, because this flurry of purchases is only harvesting the last crop of qualified buyers, without promising any new growth. In many parts of the country, this last hurrah has already happened, and sellers are now faced with a shrinking market that is quickly becoming a buyer’s – no longer a seller’s – market.

But how do we know whether it is a buyer’s or seller’s market? It is a bit like watching the tides when they begin to shift on a beach – only by looking very closely at the action of the currents can you observe the specific signs that indicate whether the water is receding or coming inland. But fortunately, one of the most dependable clues in the real estate business is also one of the easiest to read, and is based on how long it takes for a house to sell. To track this critical data, simply ask your Realtor to provide you with information on sales in your neighborhood, and make sure they include a category known as “time on the market”.

The broad average of this measure is normally about 12 weeks. But this can vary considerably, depending on the particular market dynamics of a given region of the country, section of town, or neighborhood. To gather accurate data related to your particular market, study the time on the market for your specific neighborhood of homes, by viewing the information from the local Multiple Listing Service or your Realtor.

In a wildly bullish market, time on the market may be a matter of days, not weeks. In a bear market, it can extend to six months or more. But as a general rule, whenever it takes an average of more than four months for houses to sell, it is defined as a buyer’s market. Conversely, if houses sell in two months or less, we have a seller’s market. Between the two ends of the scale, there is room for all sorts of change and variation, but you can adjust your reading of the market timeline by watching the figures related to the time on the market. If the average compresses to a matter of two or three weeks, it may be a sign that demand is extraordinary, and that the market is extremely favorable to sellers. During a recession, the time a house sits on the market can extend to years, even if sellers continue to drop the price. At such times, rather than running away from the real estate market, many professional investors go “bottom fishing”, and accumulate property at bargain basement prices.

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