Realizing When To Re-Enter The Market
A: Forgive me for writing about general topics for the next few weeks while I commute back and forth to NYC for work and time is limited with the loss associated with travelling. I'll go back to real data posts once I move back to NYC, which hopefully should be next week. For today, I felt like discussing what "Dave" brought up in yesterday's comment thread about finding the market's trough; how do you do this? Well, I'm no fortune teller or Wharton graduate, but here are a few things I would look for should you be an active investor in housing who buys and sells more than the norm hoping to take advantage of market trends.
In yesterday's post titled, "Housing Slowing; More Interested Buyers", Dave provided this comment: How do you decide when the market is at it's trough? What you set out above is to see if something is priced below what was sold in the building previous. However, what if you buy now and prices are lower in 12 months time? We know property is inflated on a global scale, but by how much, we have no idea. How does the contrarian property purchaser decide when is the "optimum" time to enter the market they are looking at? (i.e. when it's at it's lowest ebb, before things pick up again).
Great question. The quick answer I gave included a combination of the following factors:
Lets go over what I thought was the best answer I could come up with to Dave's original comment.
Interest Rate Policy
Monetary Policy is set by the federal reserve board of governors and headed by Ben Bernanke. The main purpose of monetary policy is to defend against inflation and control pricing stability; however, policy is usually changed to reflect current events that are affecting the nation and the economy (i.e., a long rate cutting campaign after the dot com bubble burst to help stimulate the economy).
Right now, policy is at a pause after 2 1/2 years of 1/4 point interest rate hikes. You probably have felt the pain of higher interest rates on your mortgage, credit card, and auto financing bills! Thats the point! The purpose of raising rates is to defend against inflation, cool the economy, and restrict investments by making money more expensive to borrow. This is already done! The question that remains is what the full affects of all rate hikes will ultimately have on the economy as there is a lag of about 10-12 months between a rate move and its affect on the economy. We have like 7-8 more months to go.
I recently wrote a post comparing housing to monetary policy, titled "Timing The Market & Monetary Policy", and is worth a look for sake of this discussion. In a nutshell:
Look To Sell - When the fed nears the end of a rate hiking campaign when the full effects of monetary policy are still yet to be felt.
Look To Buy - When the fed nears the end of a rate easing campaign and interest rates are nearing their bottom. When the fed reverse's course and starts to raise rates again, consumers will rush to lock in the low rates while they are still there PLUS the effects of lower rates to stimulate the economy are yet to be fully felt, and that can only be good for housing if the economy picks up 1-2 years later.
INVENTORY LEVELS
It is no surprise that inventory levels right now are at recent highs. Now that the psychology of the market has turned negative, with the media outlets assuring this dynamic remains, more people are choosing to sell their homes than there are looking to buy a home. The result is a rise in inventory levels to the highest level in 7 years, I believe is the last stat (correct me if Im wrong).
Inventory levels is something that you have to use some investment savvy with in predicting. If you wait for the data to prove that inventory is at its highest point, than its too late. You need to have a sense of where levels are heading in the future to really nail it down.
To answer Dave's question, in a nutshell:
Look To Sell - When inventory levels are below normal levels and supply is just very limited. Tough, I know. But if you realize 10 people at an OH with you, a filled up sign-in sheet, and bidding wars, then you know that inventory is tight and now is a good time to sell!
Look To Buy - When inventory levels have topped out, reversed course, and are into a correction to more normal levels. If the average # of listings in your local market is 5,000 at any given time, yet that has ran up to 8,000 recently, than you would want to get back in when this reverses course and is closer to 7,000 or so (a hypothetical example). You want to buy when supply outweighs demand, OH activity is lethargic, and good bids for sellers are hard to come by.
TIME ON MARKET
A big indicator when trying to determine if it is a buyer's market or a seller's market. If time on market is on the rise and nearing a long term peak, than you know its a buyer's market and seller's will have to adjust their prices to move a property. After all, the reason why the property isn't moving in the first place is because the price is most likely too high! Hence, a correction is in the works.
In a nutshell:
Look To Sell - When time on market is lower than the norm for your local market. Right now time on market for most of the country is at a 10 year high or so. Not the best time to be selling as you may get desperate. You want to sell when property's are moving very quickly due to the huge demand and bidding wars that result.
Look To Buy - When time on market tops out, starts to reverse course and head back to the norm. Again, once this trend gets started it takes an awful lot to reverse course. Try to buy when time on market is still relatively high and sellers are forced to adjust pricing to maove a property.
RENTAL COSTS
The final piece to my puzzle. Rental costs are on the rise as rental buildings have converted to condos to take advantage of market trends and would be buyers get priced out of the housing market and look to wait it out by renting. The result is very low vacancy rates in most major cities, giving pricing control to landlords and managment companies. Not good for renters.
However, as housing continues to cool and rents continue to rise, there will be an inflection point. Nothing goes on forever and this is no exception.
In a nutshell:
Look To Buy - When rents are high and on the rise. This way, at some point there weill be a level where rental costs are so high that BUYING makes the most sense. This may be happening right now and there very well may be a rent induced buying surge in the near future in NYC.
Making a decision to SELL on rental costs is not really related. At least I dont think so. On the other hand making the decision to BUY because renting is just way too expensive, does make sense. So, I'll leave out 'look to sell' for this one.
CONCLUSIONS - To answer Dave's question:
How does the contrarian property purchaser decide when is the "optimum" time to enter the market they are looking at?I would answer:
A Delicate combination of when the fed nears the end of a interest rate easing campaign, when inventory levels have topped out and reversed course to more normal levels, when time on market has topped out and starts to reverse course toward the norm, and when rental prices stop rising and vacancy rates start to creep up again.If you can convince yourself of these 4 fundamentals, than I would say to the contrarian that is a financially healthy time to re-enter the housing market. Now all 4 may not happen at the same time so you need to decide for yourself whether 2 or 3 of these fundamentals happening at the same time warrants a buy signal for your local market.
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Comments (2)
Good article Noah, thanks for getting into the "meat" of my question.
I definitely agree with your points you raised as key fundamentals. What do you think about the following variables as potentially being worthy of consideration too?
* Employment stats - is emplyment rising/falling and in which sectors? Banking/financial cutbacks could signal a weaking urban "money purse", particularly important for the financial capital's like Manhattan/London, where prices at the lower end of the market can be "pulled up" by the high end where the bonuses are being spent.
* General economic health/well being -as an indicator to provide strength for all markets (not just property) going forward.
* Influx of foriegn investment into residential property - it's hard to get stats for this sort of thing in my experience, but anecdotal reports in the financial press can give you an idea. Where is the money coming from, and which end of the market is being "propped up" by foreign investment.
* Level of per capita debt - record numbers of people on both sides of the pond have MEW'ed (Mortgage Equity Withdrawl) like crazy to fund a lifesyle that their wages couldn't keep up with. We are seeing rising numbers of repossession's (foreclosures), personal bankruptcies and record numbers of unsustainable secured debt. The party has to end sometime, and examing the per capita debt:earnings(income) ratio could give us an idea of whether the general public are overspending and overstretching themselves.
* Analysis of the types of mortgage and numbers thereof being taken out - exotics and interest only mortgages rising to all time highs. People opting for Interest Only with no repayment vehicle in place in an effort to stretch just to afford to get on the first rung...it all adds up to a precipitious knife edge balancing position where, as you mention, rates can change and people can struggle to pay back their loans. Here in the UK we can see exactly what type and specific volume of different mortgages taken out through the Council Of Mortgage Lenders website. It's useful to see exactly who is buying what (6 fold increase in number of BTL (Buy To Let/Lease) mortgages in the last 5 years in the UK shows the market movement is propped up away from first time buyers, and more to speculators, for instance. As we have seen from the dot com blow out, when most people get into something because everyone is doing it and it's seen as an easy way to make money, perhaps the contrarian investor will be getting out as quickly as he/she can? Yields on BTL property in the UK is at an all time low, and the precipitous knife edge i mentioned is definitely an issue for the more recent speculator riding the wave of positive spin in the media ("prices only ever go up" etc). Basically the more the speculators are "piling in", the better the odds the contrarian should be thinking about "piling out" perhaps?
* Taking a global outlook - we know the world has not seen a global housing boom like the one we have experienced in the last decade. I think as the world "shrinks" and access to wider pools of more accurate info mean that buying a property abroad (for retirement or investment, as many in the UK have done) or a second property in the UK, means that more and more people are opening themselves up to the associated inherent risk in investing across markets. As one market takes a hit and slows down, as the US is, it will have a knock on, "domino" effect on other markets. We are also seeing a global retractment of record low interest rates and a global upward pressure on inflation across the board - it's something never before seen on such a comparable level and something that can be watched to see how one economy can affect another. Certainly as the saying goes, "when the US sneezes the rest of the world catches a cold" and it will be interesting to see what happens to markets here, if the US heads south, housing market-wise, and/or general economy-wise.
It's a tricky business, and timing any market is extremely difficult if not impossible as we all know, but i think some of the "softer" factors i mention above may help anyone to get more insight into where things may potentially be going.
Thoughts?
Posted by Dave | October 4, 2006 3:18 PM
im looking to get back into realestate property managment in nyc or long island . i have 11 years in the industr plus major expertance in construction. i am looking for part time. i can travel to multiple sites daily.
richie
Posted by rich fino | September 20, 2007 7:36 PM