Market Volatility in Real Estate
By Steve Gillman - 2010
We all recognize market volatility in things like stocks,
since they are quoted daily and the price of a given stock can
easily change by 5% or 10% in a day. We miss the market volatility
in real estate however. Let me explain...
What if you had to sell your house today? Would that make
you a little nervous about getting the best price? Of course
it would, because on any given day you might not have the best
buyers for your property in town. If you absolutely had to sell
today you might have to dump it on an investor for 20% less than
you could have sold for with time.
This shows us that the value of real estate actually changes
from day to day--every bit as much as stocks do. We don't see
it because we do not sell every day, nor is there any way (currently)
to see what offers might be made for your home on a given day.
Suppose your home is "worth" about $190,000 given enough
time to sell. If no interested buyers are around right now and
you had to sell today or even this week, you might have to drop
the price to $150,000 to get a sale. If the right buyer is in
town looking next week, you might sell for $200,000 at that time.
The true cash value is $150,000 one week and $200,000 the next?
Now, some will protest, "but you don't have to sell!"
That's true, which gets us back to those other volatile investments--stocks.
Is the value of a stock selling for $23 really $23? If you are
fairly certain that it will be priced at $40 sometime in the
coming year and you can wait to sell, that suggests a higher
value than $23. Buy that stock!
Of course there are no guarantees--not in the stock market
nor in real estate. Your house might be appraised at $190,000
based on finding a buyer within six months or so, but then by
the end of six months it could be worth a lot less too. Real
estate values can drop--as we have all learned--just like stock
I wish I could offer something more useful for you to do with
this idea, but mostly I just find it fascinating that the cash
value of a house might jump up and down by 25% daily, and yet
we sleep well because we are fortunately ignorant of these daily
gyrations. With stocks we get to sweat as we watch them rise
and plunge in price from day-to-day and month-to-month.
I can offer this bit of advice: Focus on the longer-term time
frame to the extent possible, and use that market volatility
to your advantage. With stocks this means buying solid profitable
companies when the stock price is beat down by events that are
not entirely relevant to the long-term outlook. With real estate
it means looking for opportunities to buy cheap from those who
need to sell fast and don't have other good buyers interested.
If you buy in an area that is growing and pay less than the cost
to build, you can't go too wrong. Then take your time selling
someday to maximize your profit.
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