Timing the Real Estate Market: Why it Doesn’t Work- and Why You Should Invest Sooner Rather Than Later

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves.”

–Peter Lynch, Investor, Mutual Fund Manager, and Philanthropist

After nearly 11 years of an economic expansion, and with real estate prices closely following or even exceeding growth in the national markets, many current and potential real estate investors are reluctant to deploy capital in real estate investments. With memories of the 2008 crash fresh in the minds of investors, many believe that the market has “topped out” and that a correction is imminent, or at least on the horizon. While playing it safe may seem like a good bet, the actual data points to a different conclusion- that time in the market is far more lucrative than timing the market.

Timing the Market: Avoid the Temptation

Even for qualified investment advisors, consistently beating the market over time is nearly impossible- 95% of advisors and other similar financial professionals are unable to beat the market each year. While some years may be better than others, over time, it is a near certainty that the market will get the best of even the most qualified among us. This does not mean that it is impossible to generate returns with equities- it just means that your chances of a consistent, year-after-year increase in your stock portfolio are next to nil. Put another way, they can’t all be winners, and at some point in your investment career, you are more than likely going to see some losses, annually or within a protracted recessionary period.

The fact that you can expect to potentially take losses in the short-term leads many investors to take a dollar-cost average approach. Instead of focusing on a single stock or sector, they invest capital in the market regularly to achieve returns similar to the overall performance of the market, which has steadily and consistently gone up during the modern era. Investors that decide to wait for the market to dip before they buy lose out due to the opportunity cost of not growing their capital, which in most cases is greater than the savings gained from buying the dip.

How Market Timing Affects Real Estate Investments

Market timing also comes into play when investing in real estate assets. Some investors believe that real estate cycles are easier to pin down compared to stocks/equities, which has led to many of them, including both retail and institutional investors, waiting for and attempting to identify low points in the market to maximize returns. However, just like the stock market, historical trends point to the fact that many investors who attempt to time the real estate markets end up reducing their overall return on investment when compared to those who invest in the sector without regard for economic cycles.

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Real Estate Tends to be More Stable than the Stock Market

When compared to traditional equities, private real estate assets see fewer flat or negative growth years. Over the past few decades, real estate as an asset class has produced substantial positive returns over any given five year period during that timespan– even when taking into account the deleterious effects of the 2008-2009 Great Recession. The data also shows that the private real estate markets are significantly less volatile than equities markets, as evidenced by volatility indicators for the NCREIF Property Index (NPI).

This reduced volatility means that identifying and deploying capital during an ideal window of time has been much harder than equities over the past few decades. It also points to why institutional and retail investors alike are increasing their real estate holdings: the asset class offers less volatility, more stability, and similar returns to investments in the stock market- with comparatively less risk than equities.

When to Hold Back

While all of this data shows a clear historical trend, it is important to remember the old investment adage: “past performance is not necessarily indicative of future results.” In cases where an economic downturn seems close at hand, it may be prudent to hold off on pulling the trigger for a real estate investment. There are three scenarios in particular that real estate investors need to look out for, nationwide or regional economic contractions, supply factors, and debt load. 

Economic downturns, the demand for both residential and commercial real estate will wane in most areas, thus increasing supply and decreasing real estate values- which is not good for most real estate investors, especially those who intend to generate returns primarily through property appreciation. Downturns may be nationwide, like the 08-09 financial crisis, or they may be regional or local. An example of a regional contraction may be a large employer like a military base or manufacturing facility moving out of the area, thus depressing demand for rental properties and negatively affecting property values.

Supply factors may also come into play when overbuilding occurs, which is why some areas of the country, like Florida, Nevada, and Arizona fared so poorly during the last recession- in addition to recessionary pressure, supply vastly outstripped demand, thus negatively exacerbating already choppy real estate markets.

Another indicator to watch out for is commercial mortgage debt. Over the past decade or so, the American economy saw substantial and regular deleveraging, with credit growth only taking off in the last few years, which lines up with the historical average for commercial mortgage debt growth. Several factors contributed to this restrained credit growth, most notably reforms undertaken after the crisis, like the Dodd-Frank Act and other lending industry safeguards designed to prevent a repeat of the dark days of 08-09.

Real Estate Investment Timing: A Final Word

There is a strong case to be made for avoiding the temptation to time the real estate markets. Instead, the old adage about time in the market being more valuable than timing the market holds as true for real estate investments as it does for other asset classes like equities. Aside from the specific situations outlined above, it makes more financial sense to focus on identifying and acquiring the best real estate investments for your retirement portfolio, rather than trying to scoop up those assets at a discount in the hopes of a more considerable ROI down the line.