Stop Trying to Time the Market
(A quick note – This piece was originally written in response to an individual who kept telling me only idiots were buying houses at these prices, and that the market was about to crash. When I finally asked them what bets they had made to profit from the market’s pending collapse, they couldn’t provide any. In other words, they were all talk.)
Stop Trying to Time the Market
You can’t time the market.
If you could, then Warren Buffett and Bill Gates would be buying your books, not the other way around.
Sorry, but it’s true.
Even the Federal Reserve, with all of the possible economic information at their fingertips, predicted the economy would grow 1.9% in 2008 –– and our banking system collapsed only a few months later.
And just so you realize, we aren’t claiming that we can either –– quite the contrary. We actually opened One South in January of 2008, right as the market entered freefall –– beat that timing!
So when I hear people tell me that they are going to wait for values to fall before they buy, I just have to shake my head.
Housing Speculation is a New Thing
It hasn’t always been this way.
If I had to peg one thing that is different between when I started (1993) and today (besides 18% interest rates in 1981) is that for the first 15 years of my career, the idea of a house as an instrument of speculation didn’t exist.
Buying a home was something you did because you were supposed to, if you made a few dollars at the end of your ownership, all the better –– but it wasn’t the reason you bought.
From the early 1960s to the early 2000s, houses appreciated 2-4% per year –– rarely more and rarely less (with only a small blip on the heels of the 1987 stock market crash.)
There was no need to bet on values moving because they really didn’t move much at all –– and especially not enough to justify speculating.
It wasn’t until the hijacking of the mortgage market by unscrupulous characters in the early 2000s that the idea of housing speculation began in earnest.
And it changed how an entire generation of home buyers now views the housing market.
The ‘Financialization’ of Housing
Sometime in the early 2000s, the housing market quit acting like the housing market and started to act more like the stock market.
In lieu of 3% appreciation per year from the 1960s to 2000, house prices shot up by 50% from 2001 to 2006 –– only to crash by roughly the same amount by 2010.
50% up in 5 years and 40% down in the next 4 feels a lot more like 1,000 shares of Apple or Enron, and not a 4 bed colonial on a cul-de-sac or a townhome near the bus line.
The bottom line is that from 2000 to 2010, housing became ‘financialized’ and people began to think of it as an investment capable of tremendous swings in value, and not the stable long-term investment that the prior generations understood housing to be.
What Can Wall Street Teach Main Street About Housing?
So if housing is now more akin to IBM or Facebook (ok, Meta,) then lets treat housing like you would any publicly traded stock.
You can hedge its value.
Hedging is basically the idea that you can protect your investment by taking a similar opposite position.
(Investopedia offers a pretty good definition of hedging if you are unsure of how the practice works –– “A hedge is an investment that is made with the intention of reducing the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security.”)
Wait, are you saying that I should purchase a home at these values and then bet its price goes down?!?
If you are worried about housing values falling, then that is exactly what I am proposing.
Hedging is akin to price insurance and when done correctly, creates a situation where you give up some of the upside to eliminate the downside.
In a hedge, you simply bet against things that have similar exposures:
- If you are wrong and home prices continue to rise, then you lose the money you spent on the hedge –– but your home price rose
- If you are right and home prices fall, then the value of your hedge goes up and offsets the loss experienced when home prices fall
Make sense?
Think about it this way, what industries would suffer greatly in the event of a housing market collapse?
- Homebuilders ? Probably.
- Materials suppliers? Likely.
- Luxury home developers? Seems probable.
- Banks? In a real estate collapse, banks always seem to be impacted.
I’m sure there are others I have not considered.
If you are worried about prices falling right after you purchase a home, then use a hedging strategy to minimize your downside risk.
The Cost of Waiting
To give the last 2 years some context, beginning in 2020, the median price per square foot of a home has climbed 25% and mortgage rates have moved up nearly the same amount (with more rate increases on the horizon.)
In other words –– you are now paying 25% more for a 25% smaller home.
Ouch.
And Zillow just predicted that house price appreciation will slow to 17% by next February. Note that Zillow is not predicting that values will fall, they are predicting that prices will only be rising 17% by this time next year.
Let that sink in for a moment –– Zillow just predicted a $400,000 home today will cost $468,000 next February (and you will probably have to use a mortgage rate that is also higher to finance it!)
Stated simply, the cost of waiting is likely quite high, so acting now is a good idea. But if you are worried, then use a hedging strategy to minimize the risk.
The Wounds Are Still Fresh
Like millions of Americans, I got my butt kicked in 2008 –– so I can sympathize with the feelings of angst that accompany bidding 25% over asking price and waiving your inspection rights. You feel exposed and at risk.
I understand how it feels because I lived it –– and, yes, I have the scars to prove it.
I also understand that pretty much everywhere you look, you can find any number of pundits and talking heads telling you that the market is about to crash and you should wait for the collapse –– even friends, family, financial advisors, and other members of your inner circle all are telling you that you are nuts to buy right now.
They are admittedly hard to ignore.
That said, the next time someone tells you that the market is about to crash, ask them how they have positioned their portfolio to take advantage of the pending collapse? I’ll guarantee they haven’t done anything.
Why? Because they don’t know. They are just standing on the sideline waiting for a correction … and have been for quite some time. And that strategy has not worked very well.
Just a reminder about where the market stands:
- inventory is measured in weeks (not months)
- pricing is rising at anywhere from 1% to 3% per month
- inflation is killing the value of your cash
- mortgage rates are rising
- materials prices are sky high
- lot development is near all time lows
- new construction is still badly lagging
- rents are up 30%
- Millennials are just hitting their home buying age
Newsflash, prices have far more reasons to rise than fall.
Simply put, buy now –– and hedge if you are worried.
Waiting and hoping is not working in your favor.
(And as my attorney recommended I do, I need to disclaim my advice. I am not a stockbroker nor am I licensed to offer advice about the financial markets. Please consult your financial advisor before playing the markets.)