In theory, timing the real estate market should be an excellent tactic to nail a solid return on your investment. If you buy a house when prices are comparatively low, you’ll make an easy profit when they start to climb again.
Of course, if you happen to purchase a house just before the market starts to decline, you could end up losing some significant money. Too many first-time homebuyers worry about market timing to the extent that they miss out on potentially lucrative investments.
So we recommend that first-time homebuyers shouldn’t try to time the market. Below are some of the best reasons.
Home Values Rise Steadily
In general, home prices tend to rise consistently. According to real estate expert Michael Bluejay, the historic return on homes, overall, is 5.4 percent a year.
Even if you end up acquiring a residence at a fairly high price, you’ll still see a significant return if you stay with the house for at least a few years. In fact, the longer you plan on staying in your home, the less you’re apt to be affected by market fluctuations.
For example, the median new home price in 1981 was around $66,000. Thirty years later, in 2011, it had risen to around $215,000. Let’s say you overpaid for the price of your home by 15 percent in 1981, and put up nearly $10,000 more than what it may have been worth.
You’d still have wound up with a profit of $139,000 (rather than $149,000). Now obviously, you might not be prepared to stay in your home for 30 years, but you probably won’t have paid 15 percent above the average market value, either.
The Market Is Cyclical
In 2008, the housing market bubble seemed unusually large and surprisingly sudden, but even though it was unusual, it had still been the product of alternating rises and falls in prices. The market cycle for residential housing unfolds in four phases: recovery, expansion, hyper supply, and recession, which repeat in a fairly predictable order.
However, the length and severity of each phase is much less predictable. We can use estimates of home prices, new constructions, and first-time homeownerships to guess where we are in the cycle, but we can’t state for certain when one phase will end and another begin.
Thus, it’s all but impossible to time your home purchase perfectly. If you start looking for a home now, the current phase might end by the time you’re ready to buy.
If you wait to look for a home until the next phase, you could end up waiting years … or even a decade until prices reach the level you want them to. By that point, you’ll have missed out on all the equity you could have accumulated with monthly mortgage payments.
You Might Need to Sell Unexpectedly
Remember, the profitability of your home purchase won’t be a reality until it’s time to sell. Just because your home is increasing in value doesn’t mean you’re making money on your purchase.
Most homeowners end up staying in a home for about seven years. Though you might plan to stay for a specific period of time, you never know when you might have to move suddenly. This can wreak havoc on your otherwise excellent plan to time the market.
If you bought a house during a somewhat low period, assuming you wouldn’t sell for many years, circumstances might compel you to get rid of the house earlier than expected — perhaps for a lower price than you paid.
It’s fruitless to try to plan your life too far into the future; there are too many twists and turns you can’t possibly anticipate.
You Aren’t an Expert
Economists spend their career studying and applying the theories of economics: how the pieces of large-scale systems interact with each other to produce various results we can see, such as changes in stock prices or home values. But there’s still a lot they don’t understand, and many will readily admit they have no idea how to predict the future with regard to these sectors of the economy.
Leading economists and real estate agents often struggle to predict trends in the housing market accurately. So how could you, with your limited knowledge and experience, hope to outperform them?
You can do all the research you want; that still won’t be sufficient to make up for the fact that this is your first home, and you likely have a limited understanding of how the market works. If you want to get involved in more active real estate investing, and tackle timing and flipping homes, you’ll have to invest the necessary time and energy to cultivate the expertise.
Value Is Subjective
Finally, remember that your home isn’t just an investment for the future. It’s also an investment for your present. You’re going to be living in this structure, not just holding it sell back to the market someday, and what you deem worthwhile in a home might be different from what other people will value.
You may be willing to pay above-market prices for certain features, or you might enjoy features that generally lower the value of a home. Your residence could be appraised at a specific figure, but it’s actual value to potential buyers is much more subjective.
Don’t let the numbers interfere with what you desire most in your residence.
Making the Purchase
If you wish to consider the state of the housing market when you make your decision to buy, you certainly may. In fact, you should.
But value and price are two different things, and knowing the difference can help you make a better investment. However, you shouldn’t let your expectations or fears of the market hold you back from making a decision — or force you into making a questionable one.
Instead, market timing should be merely one of the range of factors you weigh in making your choice for your home. If you’re ready to start looking for a house in the Houston, Texas area, make sure you take advantage of Green Residential’s innovative property search tool, or contact us directly! We’ve been helping homebuyers for years.