Cheap Property or Cheap Money: Can You Really Time the Market?

A Business Insider article recently reported that Zillow has listed a staggering 93% of the hundreds of homes it purchased in Phoenix at a loss, showing just how clearly they’ve been overpaying for properties. Look, the truth is we really need to reconsider capital formation in this country. This winner-take-all system is messed up; tons of money rolls up to these big software and tech companies that have to use that capital, so they deploy it by overpaying for properties. Everyone knows they do this! You can easily verify this information or just see for yourself. In this market, we are seeing prices, especially in the entry level housing, increasing very quickly. But if you’ve heard Jason talking about The Hartman Comparison Index™, you’ll know that in most places, real estate is still quite cheap. But if you are unaware, don’t have the info or don’t ask the Jason Hartman question, naturally you’ll still think it’s very, very expensive. Jason believes that in cyclical markets (he also calls them trophy markets), with glorious highs and really ugly lows, real estate is mostly overpriced. However, in hybrid and linear markets, there are still lots of bargains to be had, historically speaking.

Let’s take a look at some of these trophy markets around the world, but let’s see how much they cost in terms of years of work. In Hong Kong today according to Statista, it would take you twenty years to buy a 600 sq.m. apartment, based on the average annual income of highly skilled service sector workers. In 2011, in Hong Kong (which is still a highly overpriced market complicated by massive civil unrest), it took fifteen years of work to afford this apartment, based on price compared to income. Today, it would take you twenty years of work to buy it. So as you can see, it’s incredibly hard to time the market; you’ll either get the property cheap or the money cheap.

Here are a few more examples from overpriced, trophy markets: in Paris in 2011, it took fifteen years of work to buy that 600 sq.m apartment. Now, it would take seventeen years. London 2011, ten years, now fourteen years. Tokyo 2011, eight years, now thirteen years. So you see, if you had waited to try and time the market, you’d be worse off now.

Compared to What?

If you compare home prices today to the last peak (2005–2007) before the Great Recession, people will say prices are historically high, but you must remember that money is worth less than half the price it was back then. Just consider mortgage interest rates (three decades of comparison) on a 30-year fixed rate mortgage in the US (other countries don’t always have those great 30-year fixed rate mortgages). So, do you want the property cheap or the money cheap? Remember that 1% in interest rate equals about 10% in price. So that’s the trade off: money cheap or property cheap. Using these measuring sticks as Jason has showed you, you can see that linear markets are still well priced in terms of entry level housing.

Timing the Market

What if you are lucky and have the best of both worlds: you buy the property when it’s cheap during a recession. At this moment in time however, you might be thinking that cash is king, so you’ll save it and try to wait to time the market, then buy everything in sight. But you were around in 2008, so why didn’t you buy then? Did you not have the cash? Was financing unavailable? Or were you just worried or scared like everyone else? As Jason always says: every deal looks great in the rear view mirror.

So if you got lucky and had the best of both worlds, you bought when property was cheap and refinanced a few years later to pull out the cash. But if you waited and didn’t buy, how can we know that housing prices will get cheaper down the road? That’s just it. We can’t know. Nobody knows. And even if it’s cheap, will the financing be available? See, you can have cheap money, but lack of availability of that money, which is what we had coming out of The Great Recession. Money was cheap, but availability was scarce and qualifying was incredibly hard because the banks overcorrected and were scared and had all kinds of new regulations. So, it’s never just about the price of money, it’s also about the availability of money.

Consider this: back then you could only get two loans. Then, you could get four. Now, you can get ten loans per spouse. Waiting to time the market is a fool’s errand: you’ll either get the property cheap or the money cheap — it’s very unlikely to get both.

Ashley & The Jason Hartman Team



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