The danger of market timing

On behalf of us would be buyers, who cares if we miss the exact bottom? During the last real estate downturn in Massachusetts, prices only inched up very slowly for several years after hitting bottom - hardly the situation where you had to rush in at the right moment or be priced out. Furthermore, this time around the futures markets are once again predicting flat prices for several years after Boston hits bottom. I am waiting because I believe prices are still too high and that they will continue to fall significantly, not because I am looking for a bottom.

I disagree.
Market timing stocks and bonds is dangerous because they are so liquid, their prices can change within minutes.
Homes are an illiquid asset and prices change over months. There will be plenty of time for buyers to get in at the bottom.

You are saying that it's difficult to predict what the trend is headed? It is headed down. I don't see how there is any difficulty in determining that. The stubborn sellers simply aren't in agreement with the buyers on how quickly it's going down.

Sidelined buyers aren't for the bottom, just for reality. When the median house price comes more in-line with the median income buyers will buy. I don't think most buyers are looking for firesale prices. Houses doubled in value over a 5 year period, prices have only come down a teeny tiny bit.

I think more sellers are waiting for the bottom followed by another harsh upswing, It doesn't take a genius to determine that our entire national economy isn't going to suddenly get better so we won't see a severe jump in prices and houses flying off the shelves any time soon.

After all, patients is a virtue.

Bears are not trying to "time" the market at all. That's only spin from the bottom-callers.

It's not about timing. It's about value. During the bubble, home prices exceeded any sound measure of fundamental value, including rent-to-price, income-to-price, and historical trends. So bears warned that the bubble would pop. It was a simple observation: something that can't go on forever, won't. Timing had nothing to do with it.

Cut to today. In many parts of the country--like here--houses are still priced well above their intrinsic value. So they will continue falling until they hit the historical trend line, and probably overshoot a little, as has happened in the past. Bears may guess when that will occur, but they don't really know, and most importantly, don't care. They're watching the ratios, not the calendar.

By contrast, a lot of bottom-callers are basing their predictions on nothing but timing, ignoring the fundamentals. They feel, subjectively, the decline has gone on "long enough" and surely will turn around soon. This is precisely the sort of error you see in casinos, where gamblers who don't understand statistics insist that their number "must" be up next.

As a Realtor in Newton, there is a general disconnect between what sellers still believe their home is worth, and what buyers believe a home is worth. Both are wrong, houses in Newton/Brookline are down some (aronund 3%-5%), but buyers are assuming they can swoop in a offer 30-40% below asking and the seller will say yes. Sellers, on the other hand, seem to think they can ride this out and the market will be better in the spring. The volume may increase in the spring but there is no fundamental reason to believe that prices will be up 10%. If you realy like a house and are planning to live in it awhile, be reasonable, make an offer. Sellers

I am one of those on the sidelines, waiting to pounce. I have a hobby of following the market. I know that sellers have to sell sometimes, buyers often do not have that pressure. Sellers will have to blink first.

Since most buyers are looking for only one house ,market timing means nothing and is simply a distraction and an excuse not to purchase .
There are many very good values available today .Some REO properties are selling for 50% of their sales prices in 2005, and there are distress sales everywhere . No one who is selling now is doing it to make a profit ,they are selling because they must sell. Now is a good time to buy, as there is less competition in the market place and you can make a good deal. Offers at 30 - 40% below asking price are being accepted. .It is a good time to buy.It is a buyers market where the buyers make the rules.

I'm not "waiting" to buy a house, I'm waiting for my investments to finally be worth something again!! I was depending on a very conservative mutual fund to help with my down payment, but now even that one is more than 50% down.

I just can't win.

Housing in Boston is still grossly overpriced, aside from a few pockets in rox and dot. Once sellers realize that the longer the wait, the more money they lose, prices begin to reach their true price. Right now, sellers are waiting because they think its a terrible time to sell. Problem is, six months from now will be a lot worse. Wages are certainly not increasing right now, and unemployment will be rising at least through 2010. The financial district is in meltdown mode, which in a years time will show some negative effects throughout Boston. Tax revenue will be decimated, and public services will suffer. Suddenly, the city may not seem so appealing to the yups who want to sip their $12 cocktails nightly. Buyers have time on their side and nothing to lose by waiting, though by the time prices reach a bottom, it'll be curious to see if people want to be in the city at all..it has all happened before, and seems certain to happen again. Good luck to buyers & sellers both.

Margaret post #6. You are correct when you say that "there is a general disconnect between what the sellers still believe their home is worth, and what buyers believe a home is worth", after that you lost me. I have been watching the Newton RE market for over 2 years and prices are way down. Some people are finialy starting to put so called new listings on the market at much lower prices. I saw a house in West Newton winter of 2007 go from the high 800's now listing for 599! Houses in Newton are not selling because the listings are too high. Who even knows what a market clearing price is at this point?

I am a prospective buyer ready to buy now. I think that prices have adjusted enough that I can still make a good investment by purchasing a two family home that I can live in for 5+ years and keep as rental property in the future. It seems that sellers just aren't willing to make adjustments to their price point. Their home is not valued at what it was just a few years ago, and presumably will be valued less the longer they wait.
My impression is that in the spring selling season many sellers are going to realize that they will not get the return they want on their investment, and those who are holding their house off the market waiting for it to get better will bite the bullet and list their home. If they are buying another home, then selling in a down market means that they can also buy in a down market. If they were looking for a short term investment they picked the wrong place to put their money. Houses are not commodities.

A house is only worth as much as someone will pay. If no one will pay what you are asking, you either need to take the house of the market, or sell at a lower price. Of course, you might find the exact buyer thinks your house is the only one for them and they will pay whatever you want. But having been to see many many homes, sellers still seem to think they can hawk junk. Times are changing, your shack just isn't worth what you hoped. However, from what I'm seeing in sales, the old saying "location, location, location" stills rings true, but the home also has to be clean, and in good condition. I don't think anyone wants to pump any money into the house they just bought, even if they intend to live there for years.

Just me: Well put. Rents will also continue to drop in most markets and so will house and condo prices. People just do not have the money any more and there is no more lending. Therefore, we could hit 25 cents a gallon for gas and it won't matter because we are in a deflationary spiral. There is more to go on the downside on house prices as long as these factors persist. More hard times ahead for all, unfortunately.

In real estate as in life there are participants and there are voyeurs. Of late the ranks of the voyeurs have swelled enormously.

These naysayers for the most part never had and never will have the means and the will to acquire real property. They amuse themselves by preaching "value", criticizing owners and congratulating themselves for renting.

The Germans have a word for this mindset...schadenfreude.

Dammit, Marcus beat me to it again.

There is a difference between timing and value. Saying that houses are mispriced on fundamentals is not saying you know the precise time house will price accurately. It may be next summer, it may be 2 summers from now.

If you are guessing, thats timing. If you are analyzing, there is actually a lot of useful information out there. Home prices aren't nearly as complicated to predict as some would have you think, if you put in the work.

And the answer to EH's how did this approach work in the Stock market this year? Very well. This was one of my better years in the stock market - it was so clearly over-valued, I not only went into cash, I than went short the S&P and leveraged it up. But that wasn't timing, that was analysis. As it was when I stopped being a developer and sold my real estate in 2005.

The fact many people don't like to analyze things doesn't mean that analyzing things doesn't work. Nor does it mean that analyzing is the same as timing. Timing doesn't work, I agree with that. Which is why, though I'm far from bullish on the stock market, I've no position on it currently.

Though as an aside, I'd have thought the Efficient Markets Hypothesis, which the original post implicitly endorses, had been thoroughly blown out of the water by post 1999 events....

The one thing that I am wondering about is mortgage rates, a significant rise in rates will wipe out affordability unless we see a capitulation in prices, which might end up happening. We'll see. Prices in my market seem to have stablized for the moment and our volume is through the roof, near 2005 levels. We are also seeing market-rate sellers are pulling properties off the market to ride it out. In our market, right now prices are pretty affordable, especially if you do an owner occupied multi-family. I have no shortage of buyers, but actually a shortage of appropriate inventory. What is not happening is the buyer desperation of the past. Even though there is not much out there, my buyers are waiting it out instead of settling.

Buyers have time on their hand and sellers don't. Buyers can keep their down payment in the bank and earn interest. Sellers have no choice but sell if they have to. Sellers will have to sell at a much lower price longer they wait. Who is the winner?

Market timing or not most people will not pay 50% of their income to become a house slave.

- NH

As a buyer I have two options:
Wait for the price of houses to drop or wait for my salary to increase where the price of a house isn't more than 3x my yearly pay.
I can wait because I have no debt, my rent is reasonable.

A bigger question that I have is why hasn't the rapid jump of housing prices been counted as inflation?

The stock market is down 50%, unemployment is over 6% with that joblessness only now hitting Massachusetts' bread basket - financial services, and the national fever is to deleverage both personal and corporate balance sheets. Yet we should believe that another highly leveraged asset (housing) which the holder typically financed by shorting a deriviatrive debt instrument ( a variable rate mortgage) should only be down 6% or so from its height two or three years ago? I think not. With the sound of the oil burner humming in the background, I'm happy to wait for the next shoe to drop. With home sales continuing to plummet, it is impossible for prices not to fall signiifcantly over the next year or two.

it's true, this is a similar stand-off that happened in the fall of 2005. the market peaked in the summer. the market inventory reached astronomical heights. buyers recognized the glut of property and wisely began to pull back and await the imminent change. then, like a feather that drops, then appears to stop or move laterally, then drops again, the market began its downturn. each time it was, and had to be, the sellers making concessions. i am an agent lucky enough to service mainly the JP area which has stood like a brick house to other markets' straw dwellings, but even here sellers are the ones who have ultimately been the ones who have needed to lower their expectations in order to get the deals done. h

I'll buy when the median home price in boston = 3.5x the median household annual income in boston.

Or take median home values from 2002 and add 3% each year for the last 6 years...

It is indeed comical to hear renters brag about keeping their powder dry by investing in the stock market. Real estate prices are down, true, but the stock markets are down 50% in less than one year.

At the end of the year I will still have a warm, comfortable home in which to reside. The stock market investors in Lehman, Bear Sterns, Wachovia, et. al. have nothing.

Needless to say I prefer my depreciating domicile their insipid investments. You never get a margin call on your home. As for sellers having to sell. There is no more motivated seller than a day trader who has received a margin call.

I'd never thought of an ARM as shorting a derivative before. Interesting thought, I'm going to have to ponder that one.

But the point - why should housing be the only asset that doesn't deflate in these deflationary times is a good one.

Especially because housing in this situation is MORE vulnerable, not less.

I do think a lot of sellers are trying to time the market, as an aside, as Scott said. So there isn't much inventory now, as everyone who can wait is waiting for the spring market to save them. Thing is, there is no evidence the spring market should be anything but down.

This months numbers were awful - prices down, and sales down. Even Lawrence Yun at NAR is vaguely gloomy.

Great posts Scott - people are responding, which is the only real accolade.

To NF, if mortgage rates rise then there will be one of two outcomes 1) home prices drop accordingly so that the debt burden remains roughly equivalent or 2) homes will just not sell. Increasing interests rates act to contract credit. A contraction in credit is called deflation. Deflation leads to lower price. It's basic economics.

To Hank, the reason that home price appreciation has not shown up in inflation (i.e. CPI) is because the CPI uses "Owners Equivalent Rent" as the basis for housing costs. It takes the equivalent rental value of a home/condo and since rents have been essentially stagnant over the last 8 years, while home prices have gone up (and then down over the last 3 years), the housing component of the CPI stays the same. This is just one of the many games the government plays with (along with hedonic adjustments and substitution) in calculating the CPI so that they can understate inflation.

I'm with the commenter who said it's not timing, it's value. I'm waiting for something to come on the market that I like and can afford. I don't feel in any rush to buy as the price appreciation witnessed in the last five years was completely out of line with incomes. Sure, it's possible someone might invent the next big thing here and Boston and create a situation where the whole world is flocking to live here, but it's fair to say we aren't going to see price appreciation approaching anything like the last several years. Without massive appreciation the decision to buy isn't rushed and is dependent on me a place that fits my needs. One of the reasons people are bidding low is that it's likely they are buying an asset that will continue to depreciate over the next five years before returning to the historical 3% gain on real estate. If I am going to lock myself into a house for the next decade, the seller needs burden some of that risk in a lower price.

This is all a mere correction and adjustment of prices. I cannot still figure out how a person who has not updated their home in many years thinks that a buyer is going to want to pay a large sum of money to to do all the work that the owner has decided to neglect all these years.

Face it owner, by putting your personal touches (old bright colored flowery wallpaper, wood paneling, discounted vomit colored shag rugs to name a few that I have seen) and not go with something more universal is not going to get you the big bucks in today's market. Why do I or any other buyer for that matter, want to have to renovate the bathroom or kitchen you decided to let go until it is old and tired looking, not to mention the plumbing and electric behind it all that could go at any time after I have paid you an enormous sum of money. The answer is I don't. Most people understand that they will be putting in money as a homeowner- after all houses are money pits, but please do not cry that you can't sell your house, when what you are offering up is old and outdated. Do some work, clean it up, and adjust the price accordingly and you will be rewarded.

Anyone else believe the Federal Reserve should engage in direct market manipulation of long-term interest rates, pulling them down in order to get
conventional home loan rates down??

Sellers wouldn't have to drop their prices. Those with inflated mortgages could refinance. And buyers would get the sale they have been waiting for!

Doing this would probably have some unintented backlash, but ,hell, I'd buy in a heartbeat with 4% 30yr fixed mortgage rather than 6%......!

Remember - If you are waiting it out and not paying a mortgage, then you are paying someone else's mortgage. Your choice.
If you are waiting to upgrade to a bigger home - again waiting means you lose. It means more time you do NOT enjoy a newer or bigger home.
In the long run, the RE market will rise as it always does. 2 years? 5 years? 10 Years? Who knows, who cares. If you are not living and enjoying yourself, you lose.

To poster #15 (john gait), I agree with you entirely. A lot of people are on the sidelines holding off on buying...but they may not be able to afford a house anyway. 20% down is a lot of CHING to put-up, so my feeling is that people are fooling themselves into thinking they can afford the ritzier neighborhoods b/c of what we read in the news (which mainly pertains to CA/FL/NV etc) about foreclosures.

We, too, thought formerly pricey (and still pricey) towns were more within our striking distance, but...alas it's too much of a stretch - and we'd prefer to live in a town where we HAVEN'T cashed out everyone to buy into...only to feel like the poorest people in the town (like if we bought in Wellesley, for example).

That being said, we've pulled the trigger & are a "participant" with a closing date before Christmas on our first home. As some have stated already on this thread "price" is what someone is willing to pay, and with the home we're buying...I have minimal hesitations of buying it at the same level as 2000 prices. Once you factor in inflation & (seller's) fees to brokers, finding a home that has CAGR less than 2.5% over the last 8 years - how much more of a pipedream are you waiting for?

If your M/O is to find the lowest price...yes, keep waiting (and waiting, and waiting, and waiting...): however, if you're looking for value - there's DEFINITELY stuff on the market beyond the "new listings" (that aren't new).

Some sellers may not NEED to sell, but they WANT to sell b/c - like everyone, they've seen their portfolios drop 40%+ in recent months. They want to free up equity/liquidity NOW - rather than wait until Spring and risk having that other "egg" shrink even more. Also, homes owned by contractors/amateur developers?...yeah, those are (or soon will be) on the market. They aren't renovating or building, and have fewer & fewer contracts...so they'll need to free up the equity they dropped into investment property (assuming they still have equity left).

People who are GENUINELY looking at buying will find deals. Those who are spectators & naysayers - well, enjoy sitting on the sidelines and continuing to watch the gap b/wn rich & poor grow even larger...

As many here have said, it's not about timing the market for absolute bottom, but rather about seeing whether the house you want will float down into your range. When housing is expensive, most folks have to compromise (location, price, condition, size, etc) ... now the question is whether it makes sense to wait a bit and see how things settle out. Maybe you get lucky. Maybe you don't. But for sure it's not going to turn on a dime and shoot up anytime soon. So why not see what impact rising unemployment has on the market, and quite possibly, your own job. It's not being predatory. It's being prudent. It's not schadenfreude. It's common sense.

I find it very interesting when posters like 'john galt' resort to categorizing others as "naysayers" , or categorize folks of never having the means to acquire property just because their views do not agree with his agenda, even though there is overwhelming data and information to support those who used due diligence instead of buying in overwhelmingly irrationally high priced market.

Better not wait too long to buy ... when things turn around prices are going through the roof. There is so much upside.

For buyers it is a right to time to buy when they can afford the payment and maintenance of the house. First and foremost a house is for shelter and has, over time, proven to be a sound long term investment purchase.

Not all sellers are selling because they "have to sell". Some are selling because its time for them to move on. Anyone who has owned their house for more than a few years has made money. If they haven't repeatedly refinanced and spent the house, then they have good equity, and they probably will not jump at insulting lowball offers. Someone who has lived in a house for 20+ years, improving and maintaining, is certainly entitled to the money they have earned. If you want a deal, buy a foreclosure and accept the risk. Interest rates are at historic lows right now; a turnaround in the economy will also mean increasing interest rates and a mortgage is for 30 years. Available stock is slowly but surely decreasing and you may be missing your best opportunity.

I have, I suppose, a somewhat different take on the housing market than many here. My wife and I did pretty well in the idiot-proof housing market of the past decade or so in buying and selling houses for a profit. We were lucky enough to land our dream house about 2 1/2 years ago and have no plans to move any time soon. We just shed the last of our investment properties a few months ago at a decent profit.

Having analyzed the local housing market at great length, we were certainly aware that the market was headed for a correction, but like many, we didn't anticipate the impact of the crushed credit market, the financial system collapse and the resulting harm that has been done to the US economy. Needless to say, there's little question now that the local housing market is still in the process of correcting and in my opinion it will continue correct for the next couple of years at least, if for no other reason than the entire US economy will be retrenching and experiencing further deflation due to rising unemployment and continuing economic weakness.

All of that said, we're happy where we are, we didn't overpay for our house, and we didn't stretch to buy it. We have decent savings and we're pretty well insulated from the serious ongoing market forces short of a complete collapse of the economy. But my take is this - if we hadn't bought our current home, we would almost certainly have plowed a significant portion of our savings into the stock market rather than tying it up in a house. Right now the stock market is down over 40% in the past year and further corrections seem likely. Unless you've been hiding your money under your mattress, you haven't been immune to this downturn either. So whether you've chosen to put your money in real estate, stocks, bonds, or some other kind of asset impacted by the market, chances are you've seen some pretty significant loss on your investments. People who are renting and saving up their money tend to think they are way ahead in this game right now, but how many of those people are getting smacked around in the stock market at this point?

Of course, some were probably savvy enough to call not just the housing downturn but the stock market downturn as well. For those of you who have been in cash for the past couple of years, I salute you. My father-in-law has been in cash for over a year now after calling this market debacle and I'm amazed at his prescience. But that aside - you've got to put your money some place - as long as you didn't wildly overstretch for a house, does it matter if you're losing money on a depreciating house or in the crashing stock market? Aren't we all getting kind of spanked here?

Just thought I'd throw out a slightly different take on things than the normal "people who buy houses are idiots" view that I see expressed on here by those who stayed on the sidelines the past several years -- and again, this is not talking about people who borrowed way more than they could afford. Too many people did that and got caught with their hands in the cookie jar and that's indefensible. I'm just talking more about the people who put money into the housing market rather than the stock market the past couple of years.

I can't predict much. But I know this. When it was going up everyone was jumping in and by the time the frenzy was in place it was over. I am trying to buy now. Not sure if it is the exact bottom. Never will know until after the fact. But just like when everyone thought the increase in pricing would never end, now it seems everyone thinks the drop will never end. Seems to me like that could be the signal of a market bottom.

pulling the trigger,
You refer to buyers who are currently waiting on the sidelines as living a pipedream, but the reality is that many would call it due diligence.

Based on current events, market conditions, recent and historical data there is nothing to support that prices will not continue to drop significantly more locally and nationally. That's the reality. The pipedream is for those who continue to think that prices will not decline significantly further over the next several years.

I will happily wait further while my savings grow (and yes I rent). I listened for several yearsto all the bulls, folks who work in the RE market, those who recently bought, or those with personal agendas concerning RE say time and time again "that those who are waiting will never buy", or "renting is throwing your money away", or some other BS about folks who continue to wait. But guess what? The market still continued dropping and still shows no signs of letting up.

Sorry bradcre but many of us who are "paying someone else's mortgage" are doing so at a great savings. Instead of spending 40 or 50% of our income on an overpriced home, we are spending 10 or 20% of our income on a reasonable rent and saving the extra money. When home prices finally reach levels supported by economic fundamentals (e.g. 3.5 times median income) we will take our large down payments and buy a home for $0.50 on the dollar. And sure, the real estate market will start rising again at some point, but it will rise at the historical rate, 3 to 4%, not 20% like the bubble years.

I agree with #39. I am paying someone else's mortgage, but we are paying about 10-15% of our family income. If I buy that number will be 40-50%. No sale. I'll wait. As for investing, no question, it is hard out there right now. But at least I know my savings give me a cushion in these difficult times. At least I am not stressed out about paying huge share of my income for an old overpriced house.

When it became evident in late 2005 that home prices had peaked, I made a prediction that the median price of a single family home in Massachusetts would drop about 50% and it might take 5 years to see the bottom. How did I come up with these numbers? I took the median income in Mass, about $55K and used a price to income ratio of 3.5:1. That gave me a target of about $193,000. (Since incomes have been stagnant for the past 10 years, I assumed there would be no meaningful rise in income moving forward.) The peak median price was $375,000 as reported by the MAR. Fifty percent of $375,000 is $187,500 which is close to my target price of 3.5:1. I figured an average 10% yearly decline was probably likely.

Flash forward 3 years and where are we at? As of September, the median price of a single family home was down about 21% as reported by the MAR. So, while my time horizon may prove to be incorrect, I am still confident that my 50% decline is very likely since it is based on economic fundamentals.

3, 2, 1 before we get a slew of posts saying there is "no way home prices will drop 50%"............

I can't believe that there are still people out there saying "renting is paying someone elses mortgage" and "if you don't buy now, prices are going to jump and you'll never be able to buy"

The only reasonable inference from those statements is that the posters are trying to sell something. No other reason why basic math would be so throughly ignored.

Whether renting or owning is better is just simply a matter of math. Anyone who makes an ironclad claim that one or the other is better hasn't bothered to do any basic analysis.

And anyone who thinks allowing one's landlord to lose huge amounts on where you are living while paying half of what a mortgage would cost is a bad thing is just nuts. At the end of the day, its not about owning or not owning, its about treating a financial decision as something that should make financial sense.

I wasn't in cash the last year JP. I leveraged up to short the market. Much better. I did put all my family into cash though.

I can afford to buy what I want now if I want. I could afford it 2 years ago. And I probably won't buy until 2 years from now, though one never knows. Paying attention to math is how I got the luxury of being in this position.

if you are buying a home for investment you must be able to meet AT LEAST the criteria of positive cash flow (profit monthly) IF you had to finance the entire purchase price at prevailing rates. That way you are at least ALWAYS in the position of making money even if prices turn down. That is the equation to live by. I have purchased nearly 10 homes in my whole life and I have NEVER lost a dime. I did not buy a property from 2003 - late 2007. And I sold 2 in 2003. ($75k profit over four years)
For an investor, like me, this is the absolute best time to buy a home wether for investment or for your house. There is more out there and the sellers are motivated. It is a buyer's market. There is weakness now and the old saying is 'buy into weakness and sell into strength'. Same for stocks. You are a fool for being in cash right now. I'd buy blue chip mutual funds and rental props in decent areas right now there are so many renters and for the next 10-15 years the rental market will be solid b/c of all the idiots who were foreclosed upon. ....right now you could be getting 8-12% on your RE and possibly a 50-60% return on stocks over the next 3-4 years.
Forget ever trying to time the market. So long as you meet the above criteria you
will always be in a solid position and be able to leverage with very good returns.
The bottom line is timing anything is just gambling.
ALWAYS REMEMBER - BUY INTO WEAKNESS AND SELL INTO STRENGTH!!

No trouble to accurately predict home values now. Goldman, Morgan, Case-Shiller futures all forecast a 40% drop in a moderate recession, and over a 50% drop in a severe recession, which, unfortunately, we have entered. A 50% drop also coincides with pre-bubble levels.

In this deflationary recession and its aftermath, potential home buyers will be happy to have a steady job in the next 2-5+ years. Going into debt for a depreciating home -- especially at near-bubble levels -- will be absolutely the last thing on "buyers" minds.

This is not market timing, simply the reality of a bursting bubble, financial crisis, and severe business contraction. Too bad for the people catching knives on the way down, but they'll be okay if overpaying a lot for a house is the worst thing that happens to them in this storm.

No trouble to accurately predict home values now. Goldman, Morgan, Case-Shiller futures all forecast a 40% drop in a moderate recession, and over a 50% drop in a severe recession, which, unfortunately, we have entered. A 50% drop also coincides with pre-bubble levels.

In this deflationary recession and its aftermath, potential home buyers will be happy to have a steady job in the next 2-5+ years. Going into debt for a depreciating home -- especially at near-bubble levels -- will be absolutely the last thing on "buyers" minds.

This is not market timing, simply the reality of a bursting bubble, financial crisis, and severe business contraction. Too bad for the people catching knives on the way down, but they'll be okay if overpaying a lot for a house is the worst thing that happens to them in this storm.

Regarding the whole renting vs buying. I was paying 1k a month to rent an embarressingly small, disgusting, old 1bdrm 800sqft apartment. I now pay 2k a month on a 3k sqft home, with 4bdrms and 3baths that is infintaly nicer. Comparing the two buying is SO much nicer for all aspects of my life. In the markets defense I did buy last winter and scooped my house up at 80k below assessment.

As mentioned earlier...Clearly some people are actively looking (or at least well informed) while others continue to dream about the prospect of homeownership with understanding all of the costs/benefits involved.

True, not all (in fact MOST) properties listed these days are above the 3.5 income/price ratio, but still there is VALUE out there and some are gems - if you're specific enough about what/where you are looking, and are ready to move quickly on financing, etc. Again, there's a difference b/wn looking for value (based on one's due diligence, of course) and waiting for the bottom.

For the less informed out there...remember that one's "mortgage" on a place equals PITI (principal, interest, taxes, insurance) ...so chances are that you'd have to downgrade in size/location considerably if you'd like ALL FOUR of these to total less than your current rents. Good luck with that....and in the meantime, keep saving up by renting b/c when you eventual buy a place it will cost more than what you're renting for anyway. (In my case, my soon-to-be principal + interest will be either $14 more or $7 less than my current rent - depending on the rate....and then add 20% more for taxes + insurance). So is my "mortgage" less than what I'm renting for?....it'll be about even - AND most of what is above my current cost to rent will be tax deductible.

Don't interpret me as saying "you HAVE to buy now"...of course not. However, don't entirely relegate yourself to the sidelines b/c you think there's not much out there. (We were about to put the brakes on until late-Spring...and then we saw 2 homes that were in a preferred community, in our price range - with big upside, marginal fixer-upper improvements.

Good luck to those continuing to look, and good luck to those who have decided to wait a little longer...

Charles, congrats to you and the 2% of the rest of America that adopted this strategy. I'd have to guess that you and anyone else who adopted that strategy are outliers and therefore not particularly useful to this discussion from a practical perspective.

JP, fair enough. But I'd argue knowing that there is a right strategy out there is useful. So often one hears "one can't time the market" or "one cannot make money through renovating a house" when the truth is "some people have the knowledge and talent to time the market, but if you don't know its you, its not you"

That would be more useful, as rather than accepting things are impossible, people could actually get into the habit of analyzing and researching, something American culture is sadly not very into. And they could learn if that is in their skillset, rather than having no idea its possible.

Basically, a rejection of timing, as its used here, is an implicit endorsement of the efficient markets hypothesis. And the last 10 years is FAR from an endorsement of the efficient markets hypothesis. We have to stop treating it as a strong theory, and more as a weak theory. Granted many hedge funds already do that (the ones that weren't just leveraging up market returns. Leveraged beta does not equal alpha.)

Joe - buy weakness and sell strength can make some sense, though like anything black and white, it misses a lot. But given that this market is NOT weak, why would you buy it? I'd be happy to buy anything that made sense, still haven't seen anything cash flow positive in areas I follow.

And the only reasonable comparison of places, rents, and prices, btw, is PITI to rent, same size house, same size neighborhood.

"The stubborn sellers simply aren't in agreement with the buyers on how quickly it's going down."

Many posters rail about greedy, stubborn or clueless sellers. What's rarely talked about is the many foolish bubble buyers who cannot afford to sell their homes, with each passing month the number is growing. The bright side for buyers, the government , try as they might will unable to slow the beat of foreclosure.....

So JP, in order to be involved in this discussion we have to be oblivious to what is going on around us? Some of us suspected back in 2003 that real estate was a bubble. Some of us suspected a year ago that despite all the pundits saying that "the economy is strong and sub-prime is contained" an economic and financial crisis was upon us. Some of us, me included suspect that the DOW could very easily drop below 6000. We don't arrive at these suspicions via crystal balls, we arrive at these suspicions via analysis of fundamentals. All it takes is a little bit of educating oneself and it is amazing what smart decisions you can make in your life.

John - I'm not saying that you should be oblivious to what is going on at all. The problem is that timing the market is incredibly difficult. First of all, about 90% of the money mangement "experts" at firms like Lehman Brothers, Goldman Sachs, Bank of America, Merrill Lynch, etc. were wrong about the market. Some of these firms were so stupendously wrong that they were forced to sell themselves or went bankrupt. If you can read the markets that much better than the experts, you should quit what you're doing and go to Wall St - you'll make a fortune.

The fact of the matter is that the markets are pretty inefficient - and plenty of people make a lot of money by being able to read those inefficiencies and invest on them accordingly. These inefficiencies result in the markets generally under-correcting in the short term and over-correcting in the long term. So let's say that 5-6 years ago when the credit markets started getting pretty out of whack - you took your money out of the market and threw it into cash - or even shorted the market - you would have lost quite a bit of upside in the former and lost your shirt with the latter even though you would have been correct from a fundamental standpoint. The market was so slow to catch up with the credit market problems that it experienced years of gains after it should have been clear that there was a problem. Besides which, most of these investment firms have so little transparency that it would be nearly impossible to gauge the scope of the problems. Who knew that Lehman was leveraged 30:1 before this crisis? Who knew how deep into the credit default swaps banks and insurance companies were? You just don't get a clear picture of what's really happening until it's too late.

My point is simply that timing the market is very, very difficult to do - and also that whether you put your money in the stock market or the real estate market, chances are you're taking a hit right now. Well, unless you're like charles who shorted everything.