Timing the Bottom of the Real Estate Market

Falling Knife

Skinny Jeans Baseball HatIt’s like wearing a trucker hat and donning a pair of skinny jeans, it’s the old new cool thing to do. Many, maybe even most, appear to be attempting one of the most difficult feats in the real estate world, timing the bottom of the market. The issue is not necessarily the timing part, but how you quantify the bottom and in which cycle, macro or micro you are timing.

Undoubtedly the number one question asked of me is, “when will the Nashville market bottom out?” The question itself is a valid one, but it is also inherently flawed. In fact, it has several flaws: are you referring to prices, inventory levels or affordability? Are you asking about homes in Brentwood or condos in the Gulch? Are you referring to the entirety of real estate in the greater Nashville area and wondering if we are trending back upward in average price? Most of the time, the later is the actual meaning, but that reported statistic is also the most misleading of them all.

It seems as though everyone keeps a very close eye on the average price of homes for the entire 1.6 million person metropolitan area, but how much does that really have to do with your property? Very little. Just because home prices in Antioch continue to trend downward does not mean that condo prices near Vanderbilt will do the same. A rising tide does not lift all ships nor does a falling tide lower all ships in the real estate world. Real estate is hyper-local.

The danger is that if you are basing your real estate buying decision on the average price of the entire market, you will most likely be misled into buying too late. It would be akin to focusing on the Dow Jones Industrial Average to make your decision on when to buy Apple stock. First, you are watching the wrong index and second, they have trended in opposite directions over the past year.

Real Estate Markets are Hyper-Local Micro Economies

Knife ManWe are all tired of the old clichés, “timing the market is like trying to catch a falling knife” and “what goes up must come down and then probably goes back up again”, but there is some truth in those ubiquitous words. Once we understand that the nationally reported housing statistics have very little to do with Nashville, we’ve just put knife catching gloves on. Once we further realize that within Nashville are dozens of smaller micro real estate economies, we have slowed the knife’s decent. Once we have married that hyper-local data with a trend analysis within your desired property segment that factors in the macro trend, now we’re on to something.

In other words, you need to work from the inside out, smallest to largest, instead of the way the national media reports it. If you do that analysis, you will find that you will buy real estate before the bottom and sell just before the peak.

Mortgage Rates do Affect Timing

For those who believe buying just before the bottom is not wise, I submit the following example. For argument’s sake, let’s all agree that the official bottom of the Nashville real estate market is going to be in September 2012. You are currently renting an apartment in the Velocity for $1,475/mo and are considering purchasing a $400,000 condo somewhere near downtown Nashville. You will be financing 90% of your purchase. You plan on living in that condo for 5 years and then moving to Boston. If you were to buy that condo today for $400,000 and finance the $360,000 at 3.875%, your monthly payment would be $1,692.85 making your 5 year cumulative total $101,571. If you wait a year and are able to buy that $400,000 condo for $380,000, but interest rates have returned to a modest 4.5%, your monthly payment would be $1,732.86 making your 5 year cumulative total $103,971.60. You have increased your cost of ownership by $2,400, missed approximately $5,000 of mortgage interest deductions on your taxes and paid the Velocity $17,700 for the privilege of waiting. All of this adds up to $25,100, which is $5,000 more than you saved by waiting a year to buy.

Additionally, the closer the market gets to the bottom, the more scarce properties become by definition. The street you wanted or view you coveted is no longer available and you find yourself analyzing second tier properties for value. This can be an indication that you likely will have a more difficult time selling your property in the future.

Some Real Estate Agents Help, Some Don’t

I hate to say it and I’ll probably be fined by my local association for committing this to paper, but the 80/20 rule is in full effect. After practicing real estate in Nashville for a decade, I have found that 20% of agents will add value to your transaction. They know how to analyze the market, make recommendations and negotiate effectively. The other 80% are what I call ‘commission seekers’. These fine agents are in it for the checks. Some need the money badly and thus, whether their client gets a good or bad deal is irrelevant. In considering the timing question, bad markets breed more of these commission seekers by necessity, so be sensible when choosing an agent.

Speak Your Mind

*