Real Estate Market Timing - Improving Your Odds
Market Timing - Missed Opportunities and Crystal Balls
"If only I would have..." "At one time, I could have..." We have all said these words more than once when reflecting on a missed opportunity. It is not easy to predict what will happen in any area of our lives. If you are looking to profit from buying and selling real estate, your ability to understand market fundamentals will be critical to your success. No one has a crystal ball but you can get close to having a 'fuzzy' crystal ball if you educate yourself on real estate market fundamentals and have access to timely, local information where you plan to invest.
Market Forces - Not Just Price
While people talk about timing a market by getting in at a low price and getting out at a peak, you need to understand that the price trend of real estate is the result of the real numbers you need to be tracking. The most important thing to keep track of is "Months of Inventory".
Months of Inventory is simply a measurement of how long it will take (months) to fully deplete the available real estate inventory at a given time. Since the price of real estate (in a free market) is determined by supply and demand, these two forces are the key things you must track before turning your attention to home prices. If a market has very low supply and high demand, the time to deplete the current inventory (Months of Inventory) will be low - perhaps 2 to 4 months; under these conditions, there is upward pressure on prices. On the other hand, if a market has excessive inventory and there is little demand, you could see a Months of Inventory in excess of 10 or 12 months. With a high Months of Inventory, there is downward pressure on prices. Most experts agree that a Months of Inventory between 4 to 6 months represents a "balanced market" with prices remaining relatively flat. By watching the Months of Inventory number over a period of time, you will be able to see, with reasonable clarity, what is likely going to happen to price.
Again, to compute Months of Inventory, pick the real estate market you plan to track (this could be all homes in a city or simply condos in a specific neighborhood). Once you have defined the market (property type AND geography), find out how many current real estate listings are for sale (Inventory). Next, divide the total number of properties sold (again, same geography and property type) in the last 12 months and divid this number by 12. If you only look at the most recent month, your number may be skewed due to seasonal fluctuations. Lastly, divide the Inventory number by the Monthly sales volume to get the Months of Inventory for that market.
If your number is below 4, the market is in a Seller's market and may not be the best time (or place) to buy. If the number is high (8, 9 months or more), the market is a Buyer's market and this may be a good time to buy (depending on if the Months Inventory number is moving down or up). The absolute best time to buy is when the Months of Inventory is steadily moving down from a high of 8+ months to the 4-6 month range. The best time to sell is when Months of Inventory has moved from a low (2 or 3 months) to the 4-6 month range. Remember, the pricing will follow this indicator. If you are tracking price alone, you will likely "miss" the best opportunities to buy or sell.
Tracking these numbers requires patience more than anything else - it can take several months to a few years to experience the shifting of markets from a buyer market to a seller market.
Peaks, Troughs, Trends
These metrics can spike or vary from month to month for many good reason - seasonality, small sample sizes, etc. I would suggest you look for trends that take shape over a 3 to 6 month period. Any less and you may pull the trigger too fast; any more and you may be leaving money on the table. By following these fundamentals, you will not need to sell at the peak or buy at the trough to do well. As long as you are within a few months of either one, you will be 95% ahead of the general population. Also, keep in mind that these cycles in real estate are often measured in five, six, and seven years or more. Take your time. Track the numbers. Be patient.
About the Author
Mitch Argon is a real estate broker helping people buy and sell
Reno real estate. Mitch publishes
The Greater Reno-Tahoe Real Estate Report monthly which tracks many of the real estate statistics referenced in this article for the Greater Reno-Tahoe area of Nevada.
