Time in the Market vs. Timing the Market

After 2022, housing experts and economists made definitive forecasts about the 2023 housing market. They predicted a potential economic recession, a pullback in mortgage rates, an increase in housing inventory, and a leveling off—or even negative growth—in home prices. In essence, many anticipated a shift towards a buyer’s market.

But twelve months later, the reality of the housing market bore little resemblance to those earlier predictions. The economy avoided the much-anticipated recession, mortgage rates climbed to a 23-year high, and home prices increased by a record 4.8% in October 2023. Meanwhile, housing inventory remained critically low, with the market recording 16.4% fewer new listings in 2023 than in the previous year.

This pronounced discrepancy between forecasts and actual outcomes highlights the inherent unpredictability of housing markets. While experts can potentially highlight general trends or offer informed opinions about decades-long trends, it’s difficult—perhaps nearly impossible—to accurately predict shorter market fluctuations—let alone time them.

This is precisely why billionaire investor Ken Fisher’s 2018 maxim—that “time in the market beats timing the market”—holds significant relevance for real estate investors in 2024 and beyond.

Timing the housing market

Timing the housing market is precisely what it sounds like. Market timers analyze various economic indicators, trends, and expert predictions to identify when to enter and exit the market. Market timing aims to maximize profits, minimize losses, and capitalize on opportunities by buying when prices are low (and are on the verge of rising) and selling when prices are high (and are on the cusp of declining).

While some investors may succeed in this strategy, most miss opportunities or lose money through market timing-fueled speculation. This is primarily because several unpredictable factors influence the real estate market, such as economic shifts, interest rates, and local supply and demand dynamics. Changes in one or two of these factors can easily and dramatically shift the market, making timing the market a risky gamble.

Compounding this complexity is the highly localized nature of real estate markets. Trends can vary significantly from state to state or market to market, meaning what holds for one city, neighborhood, or block may not apply elsewhere.

A more reliable option is to focus on durable long-term trends, which consist of broader demographic shifts, urbanization patterns, and economic fundamentals that persist over short-term market cycles. This long-term orientation empowers investors to eschew fear-, impulse-, or short-term noise-based decisions in favor of a measured, grounded, and objective strategy.

Time in the housing market

By contrast, the ‘time in the market’ approach adopts a patient, long-term perspective. Investors prioritize markets that offer steady growth and stability and instead pay little heed to the intricacies of short-term fluctuations.

Rather than chase an elusive—or perhaps nonexistent—” perfect moment”, investors who care about the time in the market focus on the fundamental value of properties. Crucially, this means that they are indifferent towards short-term gains or losses and are willing to weather the natural ebb and flow of market cycles as they come.

Luckily, this long-term approach is effective. While real estate values may decline over months or even years, property prices in the United States trend upwards over decades or longer. Put another way, the longer you hold a property, the more likely it is to yield positive returns—regardless of near-term market fluctuations.

Of course, this isn’t the only reason to buy and hold real property for the long haul. Other factors—such as real estate’s income-producing potential and its role as a hedge against inflation—likewise give “time in the market” an edge over market timing.

Appreciation

U.S. real estate—particularly single-family homes—has historically appreciated over time. Thanks to the effects of compounding, even small, consistent gains in property value can have a significant impact over a sufficiently long time horizon.

For instance, the S&P/Case-Shiller U.S. National Home Price Index, which measures the change in the value of U.S. single-family homes, rose from 159.556 in October 2013 to 312.953 in October 2023—an increase of roughly 1.96x.

In context, a single-family home valued at $200,000 in October 2013 would have nearly doubled to $392,000 by October 2023. While investors may (and usually will) have to brave dips and cycles in between, holding onto properties for significant durations—a decade or longer—generally results in positive returns. Best of all, this holds even if investors do not perfectly time their entry and exit points.

A hedge against inflation

Real estate also acts as a natural hedge against inflation, the rising cost of goods and services over time. As inflation increases, the value of your property tends to rise along with it—or even exceed it—thus protecting your purchasing power over the long haul.

This protection is evident when considering the total rate of return (i.e., appreciation plus rents less depreciation) on residential properties, which have historically clocked in at an annualized rate of 10.6%. This figure is 6.8 percentage points higher than the average annual inflation rate, which, over the past six decades, has measured 3.8%.

In other words, annual returns on rental properties have kept pace with inflation and often exceeded it. This fact bodes well for investors who remain invested. While patient, long-term investors can be confident that their properties will appreciate more than inflation over the long term, those timing the market risk missing out on these potential gains.

Stable rental income with increasing rent rates

One obvious perk of time in the market is that healthy, cash-flowing properties can generate stable monthly rental income. A well-located property in an area of high rental demand can fetch handsome rents (and thus significant net operating income) regardless of short-term market trends. Investors can even leverage lucrative tax write-offs to reduce the impact of income taxes and maximize rental income, which can be used to purchase additional property.

Better yet, rents tend to increase over time, largely due to the inherent demand for rental housing. In the five decades between 1974 and 2023, inclusive, nationwide rents increased at an annualized rate of roughly 4.1%, edging out long-term inflation by 0.3 percentage points.

Seize the opportunity

While 2023 was challenging for the housing market, 2024 appears more promising. Mortgage rates have since cooled off for nine weeks, with the 30-year fixed mortgage rate averaging 6.61% in the week ending December 20th. As rates fall, new listings are expected to increase. Sellers—previously reluctant to give up their low mortgage rates—may now be more motivated to sell. Although home prices may remain elevated, increasing inventory and slightly lower mortgage rates could provide more breathing room for buyers.

At Spartan Invest, we’re topping things off by offering a forward commitment option. This allows you to lock in a 30-year fixed-rate mortgage at 5.99% on any property in our inventory. By purchasing this low rate upfront for several properties, we absorb the risk—enabling us to incorporate the cost into the purchase price and lower your upfront costs. If you’ve been waiting on the sidelines, now is the time to dive in and enjoy the benefits of time in the market. Contact us today for more information!