and the answer is
WSJ’s Stewart gets smug
Jonathan Miller started a thread on Matrix about market timing, in response to James Stewart in the Wall Street Journal expression of relief about not having to listen to more people brag about their real estate. Quoting Stewart:
Let’s be honest with ourselves: Aren’t you just a little glad the real-estate boom is over? No more bragging from self-congratulatory owners of property in high-priced areas. No more breathless tales of bidding wars and comparative sales.
Miller’s law on market timing
Miller then went right at Stewart’s thesis that buyers are on the sidelines because they are worried that prices will fall. Says Miller:
The problem with this mindset is knowing when the bottom is upon us. Its more like hindsight, you know after its starts to increase again. (And it was kind of like knowing when the top Its often characterized by a burst in activity. Buyers hold off as long as they can and their participation is often triggered by an unforseen significant economic condition. Market-timing [Wikipedia] doesn’t work in real estate.
I have always had this view, but I have been unable in many conversations to cogently explain why market timing is so difficult. (I took another shot on this Matrix thread, but I would not consider my contribution to be one of the highlights.) II tried it last month on this blog.
Some of the (real) highlights from the responses to Miller’s post:
I might be able to market-time the cost of housing, but I can’t market-time things such as losing my job, getting a new job, having a baby, terrorist attacks, parents dying, getting divorced, having a mental breakdown, or inheriting wealth.
From John K
While I agree that many are on the sidelines, I disagree as to why.
I don’t feel people are not purchasing because they fear prices MAY fall, people are not purchasing because prices have NOT fallen.
From Rich n NNJ
New Jersey bubble-blogger James Bednar talked about efficient market theory and real estate:
Market timing is a perfectly valid concept in an imperfect market, especially in those markets where information isn’t equally shared among all players (an information asymmetry exists). A single participant who receives advanced notice of information will most certainly have an advantage over the other market participants.
While I don’t believe it possible to “time the market” in a traditional sense, I do believe that the price of an asset will revert to it’s fundamental-driven mean when both overpriced and underpriced.
He then explained that if the real estate market were an efficient market, there would be no need for appraisers:
Because there is no need for valuation experts in an efficient market.
Because the market price is always perfect, always represents all known information. There is never any reason to doubt that the market price is the correct price at that moment in time.
Miller summed it up in response to Bednar:
With all the technology and public disclosure, real estate is still an incredibly inefficient transaction. If you are objective and immersed in the market, you can get a sense of a general direction on many occasions, but try to narrow that down to increments of a month, quarter or even a year. If you are able to do this, its really just luck.
I will keep this thread for future reference.
© Sandy Mattingly 2006