The axiom “There’s no time like the present” works in many facets of life: exercising more and eating better, for example.
One more to add to that list for many people is buying a home. The question becomes, should you buy now or is it better to try to time the market?
In theory, of course, it would be best to buy everything at its lowest price, especially investments that tend to fluctuate in price, such as stocks and real estate. Of course, you need to do your research first. A wise man once likened buying stocks without any research to playing poker without looking at your cards.
But once your research is done, it’s often best to make the commitment to buy. The problem with waiting is that the stock price may very well continue to go up as you wait for the price to come down. For example, someone who starts watching a stock when it’s at $25 per share, and waits for it to go to $20 before buying it.
Sometimes that strategy works, sometimes not, because if the stock keeps climbing past $30, then of course it would have been better to have just bought it at the original $25.
Research shows that with stocks, time itself (as opposed to timing) is one of your biggest friends. Consider this chart showing your compounded return if you had invested the same dollar amount in stocks once a year from 1965 to 1995, with three scenarios:
Here are the results:
Compounded Annual Return
1 – Bought at yearly low: 11.7%
2 – Bought at yearly high: 10.6%
3 – Bought on first day of each year: 11.0%
It’s evident that there is very little difference in the total returns for each, especially given how much time and energy people can put into painstakingly trying to time the market. That’s because time is your friend in every case. With a primary residence, it rings true even more. Here’s why:
In such an occurrence, neither party would blink an eye. As the payments continue to be made and the property builds equity, it makes it even more likely as time passes, that home prices will rebound from their temporary lows.
In summary, as long as the proper loan conditions are there (enough down payment, financial stability, etc.) market timing with home prices usually doesn’t seem to make much sense, as is the case with stocks.
And while you cannot physically live in stocks, you can certainly live in your home. When that basic fact is combined with the down payment’s effect, it makes “no time like the present” a truism.
Can you afford the home?
The first step for the buyer is to consider whether there is a realistic opportunity for purchasing a home. Important considerations include:
Get your finances in order
Before even thinking about starting the process, you should make sure the following are all true:
Lenders will want the following documents at a minimum: