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Is the market too hot?

With intense competition among buyers driving prices through the roof, I think it’s worth exploring the question of whether now is a good time to buy, either for an investor or an owner occupant.
Lorem ipsum amet (4)So does it make sense?  The answer depends on your time horizon. In previous years I used the rule of thumb that as long as you were planning on keeping your property for 3 years or more, you should buy. In this market, where it’s common to have 5, 10 or even 20 offers on desirable properties, and winning offers typically have little or no contingencies, I think a 5 year minimum hold period is more sensible.

One way to conceptualize what is happening in the market is that buyers are willing to anticipate the appreciation curve and pay now for future appreciation. People can see that the market is appreciating at a very rapid pace, perhaps as much as 15% this year. So they may submit a non-contingent offer based not on previously sales (which are already months out of date since they went under contract 60-90 days ago) but based on where the appreciation curve will be in 2-3 months’ time. So the gap between previous sales and the winning offer price amounts to 4-6 months up the curve.

For investors competing in this market, caution is advised. Because investors benefit from not just cash flow, but also appreciation and tax savings (through depreciation), some investors look at the market trend and decide that cash flow is not a significant consideration. Indeed, some investment purchases with minimal cash flow could very well still turn out to be outstanding opportunities. But a cash loss is still a bad idea because you are relying entirely on future value, which is inherently speculative and risky.

For people looking for homes for themselves, I am still a firm believer that you should not attempt to “time the market”. As long as you are buying and have no plans to sell in the next 5 years, you will most likely still be very handsomely rewarded for getting into the market, even at today’s price levels.

Participating in this market is very challenging though. In the article below I review appreciation statistics for some of our local markets.


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