Buyers have been asking, “Are we at a market bottom? Are real estate prices stablized or are they going down more?” No buyer wants to pay too much for a home, so these are intelligent questions any discerning retiree is going to ask. But these questions have been relevant for a couple of years, and to this date no one has been able to call a market bottom or “time the market.” Here are my thoughts on why no one has been able to call a market bottom.
In the context of investing in the stock market, there are those who claim that you cannot “time the market,” and these are the financial advisers who recommend investing for the long term. Long term fund managers and financial advisers rely primarily on fundamental analysis. On the other hand, it cannot be denied that there are many who have become very wealthy by “timing the market” by buying and selling at the right times, or at least often enough to come out very profitably. These folks tend to rely more on technical analysis by reading charts. Their argument is that a chart represents all investment variables and that’s why chart patterns have meaning. Market timing, whether it is in stocks, options, or commodities, is not a game for the feint of heart. If you want a stressful two hours, try flipping volatile options in a wild market.
Market Bottom and Real Estate
Real estate does not have as many players jumping in and out of the market every hour (or every second) of every day like the stock market, and you would think that identifying a market pattern or a market bottom would not be so complicated in the real estate market. But no one has been able to call a market bottom. I have been very cautious and have not called a market bottom, and here is why. There are several key elements to accurately predicting a market bottom, and if you have credible information on a majority of these elements, you can draw some intelligent conclusions regarding the market. Right now there are key elements that are still wildly unpredictable. Consider these totally unpredictable events that are major determinants in accurately predicting when we will be at a market bottom in real estate prices. I’ll start with the big picture and drill down to our local market.
1. The state of the global economy is radically uncertain. The debt crisis in Greece is an unfolding economic nightmare the world has never witnessed. The European community is on the precipice of who knows what? The world’s most educated economists cannot agree what will happen.
2. The International bankers are not sure if there will be a world recession or a slow turn around. There are simply too many variables for bankers to measure the risk in their portfolios. So intimately interconnected are International markets, a single country devaluing their currency would set off a chain of events that would continue to reverberate across the world and cause even more unpredictable results.
3. If one or more European countries goes bankrupt and defaults on its debt, no one has been able to unwind all the implications for the U.S. economy.
4. The U.S. debt crisis continues to grow, and politicians are playing Russian Roulette with our nation’s budget. More downgrades of the U.S. credit rating are being discussed. Like a runaway train, a massive financial collision seems imminent, but no computer model and no super committee is able to tell us what will happen. We, the American people and non-government workers, are the hostages at risk. Meanwhile, the middle class is being systematically wiped out.
5. The U.S. real estate market is still in shambles. The extent of the mortgage fraud is still unfolding. And by fraud, I am not referring to the con men who cheated on mortgage apps. I’m referring to the crony capitalism and the fraud committed by politicians, Fannie Mae and Freddie Mac executives and board members, investment houses on Wall Street, mortgage companies and banks, and, of course, consumers only too willing to jump on the band wagon of free money. My economics prof was right. There’s no such thing as a free lunch. No one has been able to draw a flow chart showing just how deep and wide this disaster goes or how long the foreclosure market will last. We’ve never been here before. How will this effect new home construction and existing home sales in the years ahead? No one knows, but it’s not pretty.
6. On a local level, the Sequim real estate market relies heavily on buyers from out of state, and many buyers must sell their other homes before they can buy in Sequim. This is true in many local markets across the country. The local real estate market depends heavily on the health of the real estate market in other states. This creates uncertainty.
These are all extraordinary uncertainties, and when you put all of these uncertainties on the table, it is no wonder that no one can call a market bottom in real estate prices. That is an impossibility. Could someone guess correctly? Yes, just as someone will win next month’s lottery, and the odds are about the same.
Market Bottom and Buying Your Retirement Home
What can you do? I have written elsewhere that we need to separate the house from the market. In other words, if you are retiring and buying a home in Sequim, whether you buy the right home at the best possible price will depend more on intelligent negotiating and wise decision making in your own financial world. In my opinion, no one knows for sure if real estate prices are at a bottom or will drop further in the next year, but I can tell you with a high level of accuracy if the home you want to buy is a reasonable price, a great price, or an extraordinary price, and I can tell you if that home will be sellable in the years ahead, and how secure you will be in this home in this location. I help clients buy homes that are wise investments. I don’t specialize in getting buyers to overpay for a home. For example, I recently sold a couple a gorgeous home for $325,000 that has a FMV (fair market value) of $425,000 even in this market, and cost the seller about $525,000 to build. Whatever the national and global markets may do, whatever the U.S. national real estate market may do in the coming years, these clients made a wise investment in a home that also happens to be their dream retirement home.
My feeling is that no one has a crystal ball to be able to call a market bottom, but you don’t need to call a market bottom to make a wise investment in a retirement home, if you do your due diligence and work with a professional buyer’s agent who knows how to make it happen for you.
Last Updated on November 22, 2011 by Chuck Marunde