Tue 5 Sep 2006
Looking On The Bright Side, If You Don’t Time It
Posted by Jonathan J. Miller under Boom Bubble Bust , Psychology[10] Comments
In James Stewart’s Common Sense column Upsides to the Housing Slowdown [WSJ], he looks on the bright side of the housing downturn. One of his earlier books was among my favorites: Den of Thieves.
Let’s be honest with ourselves: Aren’t you just a little glad the real-estate boom is over? No more bragging from self-congratulatory owners of property in high-priced areas. No more breathless tales of bidding wars and comparative sales.
As a writer of real estate market conditions in my various market reports, I can vouch for him on this point. I was beginning to feel like a broken record.
The real-estate market during recent years had many unhealthy economic and psychological effects. Soaring prices forced many people, especially young people buying their first homes and starting families, out of many markets. It pushed too many people into dreadful mortgages. It misallocated capital to construction for which there was no fundamental demand.
Affordability issues applied the brake to the housing boom.
Purging the market of excess speculation will no doubt yield some tales of plunging prices and hardship.
Stewart suggests that buyers are currently resistant to buying because they are worried prices will fall. Analysis paralysis is the new market condition, as the saying goes.
It is a paradox of falling real-estate values that buyers balk at paying far less than they would have in a rising market, simply because they’re afraid the value may decline further after they buy. All of a sudden they’re market timers, aiming for an elusive bottom.
The problem with this mindset is knowing when the bottom is upon us. Its more like hindsight, you know after its starts to increase again. (And it was kind of like knowing when the top Its often characterized by a burst in activity. Buyers hold off as long as they can and their participation is often triggered by an unforseen significant economic condition. Market-timing [Wikipedia] doesn’t work in real estate.
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September 5th, 2006 at 4:39 pm
“Market-timing doesn’t work in real estate”. WOW! I have never been able to say that without modifiers, myself, but thanks … now I can quote you as saying it.
I blogged about it a few weeks ago when CNN/ Money ran a piece about Bubble Sitting that got picked up in Curbed and elsewhere. Your buddy Urban Digs – on honeymoon in Europe, god bless him – posted about a month ago about trying to time the market based on the Fed’s moves, which he called “difficult, but not impossible”.
I guess I would put it as “theoretically” possible, but essentially impossible.
The example I used from the CNN /Money piece was about a smart guy with access to lots of data who appears to have been at least three years early in calling the bursting of the real estate bubble. My guess is that he will not recover the lost appreciation (from selling, then living in a rental for three+ years) for at least a few years, assuming that he times the market perfectly by buying back in at the bottom. But since he was off by a few years at the top, there is no reason to assume this market guy with access to lots of data will get it perfectly right at the bottom.
With speculators being such a small part of the Manhattan market (at least compared to the US overall), I think that most people who plan to live in a loft or apartment for five years or more should just go ahead and buy the unit that best meets their needs today – assuming they have the assets and income to do so. The risk of making a mistake is too great if they try to time the rather peculiar Manhattan apartment market.
And thanks for the Wikipedia entry about market-timing. The prevailing Wiki-view (today, at least) is that some people can time the stock market, but that most cannot (even professionals). If most pros can’t time the most transparent efficient we have in this country, then why would anyone think they could time real estate??
Stewart may soon rue the change in Manhattan real estate talk. He may escape the bragging, but is he prepared for the angst of bubble-chat: “will it pop? when will it pop? what will happen when/if it pops?”
You know that Manhattan will continue talking real estate as a spectator sport, at least. See the cartoon from Gaping Void on my blog for a chuckle (I hope).
September 5th, 2006 at 5:31 pm
I might be able to market-time the cost of housing, but I can’t market-time things such as losing my job, getting a new job, having a baby, terrorist attacks, parents dying, getting divorced, having a mental breakdown, or inheriting wealth.
It may not be impossible to market-time housing prices, but simply impractical.
I bought my condo because I needed a place to live!
September 6th, 2006 at 1:44 am
As a buyer of rental properties, market timing has worked very well for me during the last three decades. My basic strategy is to buy only during the below norm years and hold forever.
During this latest cycle I bought during 1998 through 2003. I am not selling this time. However, in the prior cycle I did sell at the peak (in early 1989 in L.A.) because I was expecting a bloodbath. I am not as worried now as I was in 1989.
In a few years, when the market bottoms, I will go on a buying spree.
September 6th, 2006 at 12:40 pm
While I agree that many are on the sidelines, I disagree as to why.
I don’t feel people are not purchasing because they fear prices MAY fall, people are not purchasing because prices have NOT fallen.
I am one of those buyers on the “sideline” and I’m not trying to time for the bottom.
But I am looking for price reductions as I feel prices are overly inflated. (That being said I do plan to stay in any home I purchase for a minimum of 10 years.)
So I feel that this doesn’t mean I’m trying to time the market. I’m just waiting for the inevitable and I think others are as well.
September 6th, 2006 at 12:43 pm
Rich – excellent point. Taking a more definite assumption about near term trends. Thanks.
September 6th, 2006 at 12:55 pm
Market timing is inextricably linked to the efficient market hypothesis. The EMH states, quite simply, that it is impossible to outperform the market. Why? Because the market is all-knowing, an asset is always perfectly priced based on all known information. All market participants share the same information and no single player has any advantage.
Market timing is a perfectly valid concept in an imperfect market, especially in those markets where information isn’t equally shared among all players (an information asymmetry exists). A single participant who receives advanced notice of information will most certainly have an advantage over the other market participants.
Information assymetry in the real estate market is just one of the reasons that it is an imperfect market. Keep in mind that real estate is a radically different asset than stock. While the stock market is far from being perfectly efficient, it is most certainly more efficient than the real estate market. Don’t forget that insider trading is a form of market timing. Does it work? Yes, albeit not legal.
While I don’t believe it possible to “time the market” in a traditional sense, I do believe that the price of an asset will revert to it’s fundamental-driven mean when both overpriced and underpriced.
James Bednar
September 6th, 2006 at 1:13 pm
One last word.
If the real estate market were perfect and efficient, corporations would have no need for people like Jonathan Miller and companies like Miller Samuel.
Why?
Because there is no need for valuation experts in an efficient market.
Why?
Because the market price is always perfect, always represents all known information. There is never any reason to doubt that the market price is the correct price at that moment in time.
In this situation, trying to judge valuation of a real estate investment by divining comps and fundamentals becomes no different than technical or fundamental stock analysis, e.g. just another way of “market timing”.
James
September 6th, 2006 at 1:22 pm
James,
Much appreciated. Markets need observers like yourself to get the word out with that kind of insight. Thats why your blog is mandatory daily reading for me.
With all the technology and public disclosure, real estate is still an incredibly inefficient transaction. If you are objective and immersed in the market, you can get a sense of a general direction on many occasions, but try to narrow that down to increments of a month, quarter or even a year. If you are able to do this, its really just luck.
September 7th, 2006 at 12:07 am
Research, analysis and decades of experience can improve your “luck” significantly. It has for me.
December 13th, 2006 at 7:36 pm
“Because there is no need for valuation experts in an efficient market.
Why?
Because the market price is always perfect, always represents all known information. There is never any reason to doubt that the market price is the correct price at that moment in time.”
I’m sorry, what? Markets are efficient precisely because people believe (falsely) that the market’s valuation, at any given time, is incorrect. Efficiency is paradoxically built on a belief that the market is inefficient.