It’s a tale as old as time. Someone tries to time the market, but fails miserably.
Then they either miss the opportunity altogether, or chase an opportunity that no longer exists and perhaps overpay in the process.
Recently, over dinner, a friend told me a story that seemed worth sharing.
It involved two families who sold their homes, but only one bought another property, while the other rented.
And guess what. Nearly five years later, the tenant is still renting.
Getting the timing right is never easy, especially in real estate
The year is 2019. The housing market has seen some impressive gains since bottoming out around 2012 (see this chart from FHFA For more on that).
Home prices have doubled in many markets nationwide. For sellers, it seemed like a very good time to cash out and move on.
Of course, if you are selling a primary residence, you will still need new accommodations. This means either renting or buying another home.
One of my friends had his first child and was expecting a second child. Like many young families, they bought a small house to get their feet wet.
But now it was time to find more space, moving from an urban area to a more suburban environment to raise their families.
The good news is that the value of their townhouse has increased significantly since they purchased it.
This means getting a large portion of the sales proceeds and ease of selling, with low inventory and high demand for real estate at that time.
It also meant finding an alternative property, which was not easy for the same reasons.
Fortunately, they were able to get a good deal on a single-family home in a desirable area close to her in-laws within a good school district.
Meanwhile, their old neighbors who lived in the same area also sold their house. But instead of buying a replacement, they chose to rent in the suburbs.
The husband told my friend that he would “wait for house prices to come down,” given how high they were.
Now I don’t blame the guy. I remember how sketchy prices looked even then, before they rose another 50% during the pandemic.
But relying on price cuts and rent choice also came with a lot of uncertainty.
Home prices rarely fall
The problem with the “wait until prices drop” approach is that they rarely do.
That doesn’t mean they’ll never go down, but home prices are pretty steady. There were only a few times when prices fell on a nominal (not adjusted for inflation) basis.
They fell further in real terms, but even then, this was a very rare event. In either case, home buyers are not looking at home prices in real terms.
The prices they see on menus are nominal. In other words, if the price was $500,000, and it is now $450,000, they will see it going down.
If it was worth $500,000, and it’s now $505,000, but inflation makes $505,000 really worth closer to $495,000, it doesn’t provide much comfort to the potential buyer. It is still higher in their eyes.
The problem is that some people have a recency bias thanks to the subprime mortgage crisis of the early 2000s when home prices fell. They believe it could happen again. That may be the case, but again, it’s not common.
Now back to the story. The guy decides to rent while my friend bought a new house. This was in 2019.
Since then, my friend’s house has gone up in price by over 50% because he got a good deal and had to do some work on the place.
He also got a 30-year fixed mortgage in the top 2, so his monthly payment is pretty cheap, even though he bought when “rates were high” in 2019.
The other man is still a tenant, nearly five years later. And guess what? Rent is not cheap. So it’s not like he scored a huge discount in the process.
You know what else isn’t cheap? Mortgage rates. Or house prices. Yikes!
If the tenant buys now they will feel like they are paying too much
So the guy who was still renting tried to time the market. It didn’t go well, at least with the benefit of hindsight.
There is nothing wrong with renting, but this particular family does not want to rent. They want to own a home.
Especially since they have children in local schools and want stability and peace of mind.
The problem now is that home purchasing has fallen to unattainable levels, thanks to rising home prices and much higher mortgage rates.
For example, a home worth $500,000 in 2019 might be closer to $750,000 today. The mortgage interest rate is 6.75% instead of 3%.
This would increase your mortgage payment by about $2,200 per month, assuming a 20% down payment. Not to mention the larger down payment required.
Even if he could still afford it, the man would likely have a lot of reservations because he refused when it was much cheaper to buy it.
To that end, he will likely continue to monitor the market and wait for a better opportunity. One may never come.
Read on: Time heals all real estate wounds if you let it
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
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