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When To Buy and Sell Real Estate

September 11, 2022 by Lazy Man 4 Comments

Quite a few years ago, I wrote an article, How We KNOW Where the Stock Market Will Go. That was a bold claim because everyone says they don’t have a crystal ball. No one knows when some world event (COVID, Russia going after Ukraine) will send markets crazy.

In that article, the key point that I made was that something called the Shiller PE (often also referred to as CAPE) indicates the stock market value. When this number is high, there’s an increased chance of a crash. Any number above 30 nowadays is a warning sign to me. When it reached around 40 last November, I wrote, Is now the time to sell stocks.

That was the top of the market. I don’t believe in jumping in and out of the market, but I did sell some stocks and buy some bonds. The idea is to be fully invested in the market but lower risk a bit. It’s worked out well, and now I’m starting to sell some of those bonds and buy stocks are lower prices.

But what about predicting when to buy real estate?

The Shiller PE number doesn’t work for the real estate markets. Instead, I’ve been using my gut. Prices felt very high when Zillow said our home was worth 25% more in a year. When we bought the house in 2011, prices seemed very low – far below what they were in 2006 and 2007.

I don’t want you emailing me asking how my gut feels about real estate. My gut isn’t going to help you.

I’ve got something better than my gut to share with you. I’ve got a metric like Shiller PE.

It’s called the NAHB/Wells Fargo score. When I heard that this existed, I decided to give it a look to see how useful this tool was in predicting whether the real estate market was high or low. This would be a terrible article if I told you that I couldn’t find much use for it. Fortunately, you are not reading a terrible article (for that reason at least). The NAHB/Wells Fargo index seems to be a great predictor of when real estate markets are high or low.

Here’s a graph:

When to Buy and Sell Real Estate
When to Buy and Sell Real Estate

Do you see how the index got higher throughout 2000 until the crash in 2008? The 3-4 years of that crash were a great time to buy real estate. We purchased our forever house in 2011. It cost half of what it would cost recently. We also purchased an investment property in 2012 for $95,000 that we recently sold for $205,000. We used that money to buy another property, which is now worth around $300,000. In ten years, we turned a $25,000 down payment into over $200,000 in equity.

How do we get the data in the graph? The NAHB/Wells Fargo score methodology is a little complex:

The NAHB/Wells Fargo HMI is a weighted average of three separate component indices: Present Single-Family Sales, Single-Family Sales for the Next Six Months, and Traffic of Prospective Buyers. Each month, a panel of builders rates the first two on a scale of “good,” “fair” or “poor” and the last on a scale of “high to very high,” “average” or “low to very low”. An index is calculated for each series by applying the formula “(good – poor + 100)/2” or, for Traffic, “(high/very high – low/very low + 100)/2”.

Each resulting index is first seasonally adjusted, then weighted to produce the HMI. The weights are .5920 for Present Sales, .1358 for Sales for the Next Six Months, and .2722 for Traffic. The weights were chosen to maximize the correlation with starts through the following six months.

As you can see, right now we’re in the middle. Interest rates have gone up and the high prices have started to come down. If you were looking to buy a home to live in, this is probably a fine time to do that. If you were looking to buy at a low price and sell at a higher price later, I would probably wait a bit. If the index gets to around 25, I’ll be looking to see if I can find real estate bargains.

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Filed Under: Real Estate Tagged With: buy real estate, sell real estate

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Comments

  1. Wesley says

    September 12, 2022 at 9:28 am

    We are in our third house. Each house was an “upgrade” that we purchased during a down market that worked out well for us. As we are closer to empty-ish nesting we’ve considered a “downgrade” or lateral to a different style house(no pool, etc), and a hot market has appeared to be a terrible time for that move(spend more for less), not sure how that will type of move will look in a slower market.

    Reply
    • Lazy Man says

      September 12, 2022 at 12:20 pm

      I should have mentioned that it works better when you are entering the market on a low or exiting the market at a high. If you are selling one home and buying another, they almost cancel each other out. However, as you noted, the “upgrades” in down markets probably work better because in down markets the prices are going to be more bunched down at the bottom.

  2. Joe says

    September 12, 2022 at 12:41 pm

    Oh wow, thanks for this post. I’d like to sell our properties in the next 7 years and buy another place. The HMI sounds like a good guideline. I need to sell high, rent for a few years, then buy when the market is low.

    Reply
    • Lazy Man says

      September 12, 2022 at 2:10 pm

      That sounds like a perfect plan to me. I like that you are using it at a guideline. Local markets and individual properties can all have their ups and downs.

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