Do smart stock market investors attempt to guess timing with their investments?

Often in the real estate industry we are criticized for giving clients advice based on our professional opinion. Perhaps out of ignorance, many people are unaware that we are bound by the Agency relationship we develop with our clients to give professional and meaningful and beneficial advice to our clients. The importance of that relationship is held up in courts across Canada. That implies that for a REALTOR® to state a comment to simply “make a sale” is very dangerous. In our industry, the simple fact that we attempt to make a living daily by interacting with selling clients and buying clients and we undergo mandatory recurrent training puts us in a position of having opinions, knowledge and an understanding of the markets that is intended to benefit you as a buying or selling client.

In many forum’s on the internet regarding real estate, you will see statements alluding to the fact that “knowledge is power”. With all due respect, that is a very untrue and misleading statement. Knowledge is inert... the application of knowledge is indeed power, that might be more aligned with wisdom, which, funnily enough I have always found comes with age! Many knowledgeable people I know are paralyzed with fear, unafraid to make decisions and are losing out on many economic opportunities that exist in today's market. I have yet to understand how “knowledge is power”, but I am always willing to learn and attempt to understand a different perspective.

Back to the title of the article. Many of you might have been impacted by one message or another recently that has stated, now is a good time to buy. Some of you may have misinterpreted that to be a “pushy” statement by a hungry real estate industry and how can it be a good time to buy when the market is still soft?

It is not the pricing of available inventory that makes this a good time to buy... it is a combination of unusual events that makes this a great time to buy. The combination of low interest rates, plentiful supply of available units for sale, reduced spread between home values for move up clients, developers willing to discount new inventory because of construction cost reductions... the list goes on. Any one of these parameters has the ability to change in a short period of time, making it a less beneficial time to buy.

Let’s take interest rates as an example. Currently and artificially, interest rates as is typical are being manipulated to stimulate economic activity. That decision alone has many far reaching economic impacts, such as profitability of the financial sector which is an area that needs stimulation. I would suggest that as we see signs of successful stimulation, interest rates will migrate upwards fairly steadily. When will that happen? Read the headline again, nobody truly knows.

Dollar cost averaging is a process for stock market investors who understand they cannot “time the market” so they average down the value of their investments by buying smaller pieces of the pie over a longer period of time and take advantage of fluctuating values. In real estate we play the waiting game... we attempt to “time the market”. If the advice you read from investment experts (successful ones at least) is don’t time the market with a $50 stock investment... why would you do it with a $500,000 real estate investment?

Let's wrap up by looking at the situation in more detail. Lets assume that Joe and Nancy Buyer want to purchase a $500,000 home with 10% down and we can run a sensitivity analysis on their lending situation. Let's further assume that they wish to find a mortgage with a 30 year amortization and a 5 year term. We can assume that with some negotiation, they may find a willing lender to give them a mortgage at 5%, but what if they attempt to “time the market” and they wait because their feeling is home values might drop a little.... how much do they have to drop to defend themselves from an increase in interest rates?

The graph below puts all the numbers in front of you to analyze, but in essence, if we see a 1% rate hike prior to a decision and they can only access a 6% mortgage, their dream home of $500,000 will have now cost them an additional $101,520 more over the life of their mortgage. If in fact the rates were to increase to 7% on the mortgage, they will need to rationalize another $208,080 in increased costs to buy the same home.

Will values in Kelowna decline any further? I am not sure, nobody is. Will they turn around? Absolutely... and they will climb again as our economy recovers. The rest of the world still sees Canada as a wonderful and stable real estate opportunity. In Canada, Kelowna is a big attractor for it’s climate, beauty and services.

My encouragement to my clients has and will remain the same. If you are thinking of buying a house, now is a good time. Take advantage of the combined effects of our economy, low interest rates, low construction costs and inventory availability... it may not happen again in your lifetime.