By Diane Saatchi
When the Dow hit 25,000 in early January, I called a financial advisor friend of mine.
“How much higher can it go?” I asked. “Should people cash out?”
She told me the same thing she told the clients who had been calling her round the clock with the same questions: In short, no, it’s probably not time to cash out.
That’s because, she explained, no matter boom or bust, the advice for the typical person is the same:
Most people shouldn’t try to time the market.
A well-balanced portfolio, my friend explained, includes sufficient liquidity to allow investors to avoid selling when conditions are unfavorable. How much liquidity is needed depends upon age, income and expenses.
That sounded awfully familiar to me, because it’s the same thing I tell real estate clients.
For most people making a decision to buy or sell a house for their own use, I usually advise that it’s the right time to buy or sell when you need or want to. While that hardly sounds like expert advice, I am a firm believer that amateurs buying or selling for their own use are generally not successful in timing the market. Things may turn out well, but when that happens, it’s usually luck — not wisdom — at play.
Real estate investors and developers aside, the average guy becomes a buyer or seller usually because of some event outside of real estate such as marriage, divorce, illness, birth/adoption, career or financial change. For most people, the urgency of those events outweighs the fluctuations of the economy, and they simply can’t afford to wait.
A second home provides more leeway.
There’s a little more wiggle room when you’re buying or selling a second home, like so many of the properties here in the Hamptons. That is, one can delay a purchase by renting, or a sale by leasing, but even then financial implications impact return on investment.
Insofar as planning is successful, any buyer should be wise enough not to put so much money in a second home that they couldn’t weather some bad times.
Ideally, you would buy a house you love and enjoy, and would sell that home for more money when you’re ready to move on. But the truth is that even if you manage to buy low and sell high, real estate doesn’t happen in a vacuum: If you’ve made a bundle on your home sale, chances are that after you settle up with the taxman, most of the windfall and then some will end up paying for the new property.
This time around, people are reacting differently to the market.
Many people are being decidedly rational about buying and selling Hamptons real estate in the wake of the tax reform bill and the recent volatility in the stock market. Would-be sellers have lowered and are lowering prices, or listing at real — not aspirational — prices. Buyers are tuned into the available inventory and noting reductions of already-listed properties.
What is most curious about our market is that we did not see the run up in volume and prices in lock step with the current bull market whereas typically, wealth created on Wall Street results in a robust second home market. And likewise, one would have predicted the tax reform bill, then the February swings in the stock market, would have stalled sale and rental activity. Yet the increase in volume that began in the fourth quarter of last year has continued — and even ramped up — in recent weeks.
This is not to say wishful thinking has gone by the wayside.
Whatever the reality, there will always be a gap between buyers’ and sellers’ expectations. [Buyers Are from Mars, Sellers Are from Venus]
Some sellers think buyers are feeling flush from having made so much money in the stock market, and they’re optimistic about rising interest rates and inflation. Buyers, who aren’t quite as exuberant as the other side would hope, think the stock market bubble will soon burst — and when it does, real estate prices will decline.
But here’s the funny thing about bubbles: We only know what was a bubble, not what is or will be one. Those of us who sell before a bubble bursts either leave some upside on the table are prescient or just plain lucky. When buying, we can wait for the bottom ... but the bottom is not so declared until prices rise.
Which is why it’s so, so hard to time the market.
Buyers and sellers are paying more attention to their personal agendas. This may be the new normal — and it’s making sense.
© 2018 Diane Saatchi