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February 24, 2020
One of the things I’m most often asked is whether or not it’s “the right time” to buy in a volatile market like we have these days. So I wanted to break down the differences between “Timing the Market” and ‘Time in the Market” so that you can make sound financial decisions not just for today, but for your long term future.
Regardless of what’s happening in the market, the MOST important thing for you to consider is how your housing payment fits into your overall budget. For most people, that payment should be between 30-50% of your overall lifestyle budget. Don’t know what that number is either? It’s ok! SO many people don’t, and I’m here to help! If you haven’t already, you can download our free budget guide from the website. This will help you calculate what your housing payment should be relative to your personal circumstances.
So what is “Timing the Market”? This refers to trying to choose the perfect time to invest or purchase a home. Seem vague? It is, and this is because no one has a crystal ball and can tell you with absolute certainty if prices will go up or down. As someone who studies the market on a daily basis, I can give you predictions and show you what the trends have been and will likely continue to be, but the bottom line is that volatile markets are just that- volatile. Their unpredictability is the name of the game.
“Time IN the Market”, however, is very different. This means investing or purchasing with a long term strategy for said investment in mind. I believe this is a sound way to make the most secure financial investments.
Now, I obviously am not a psychic, but I do study the market to give my best advice possible to my mortgage clients who are looking for the best rates possible on a daily basis. Having done this for so long, I can tell you that the market that we are seeing right now is really different than anything we’ve experienced in recent history… it’s similar to the market we saw back before the crash in 2008, but there are some very important differences.
To understand why it’s an uncertain market (and how it’s different from 2007-2008), it’s important to have a grasp on the relationship between stocks and mortgage interest rates.
“A bond is a fixed income instrument that represents a loan made by an investor to a borrower. A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations … Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually includes the terms for variable or fixed interest payments made by the borrower.” (Investopedia)
“A mortgage-backed security (MBS) is an investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them.” (Investopedia)
A stock (also known as “shares” or “equity”) is a type of security that signifies proportionate ownership in the issuing corporation. This entitles the stockholder to that proportion of the corporation’s assets and earnings. … Stocks are bought and sold predominantly on stock exchanges, though there can be private sales as well, and are the foundation of many individual investors’ portfolios.” (Investopedia)
I know- it’s a lot of definitions, but if you love learning about the way money can work for you (I sure do!), this is like catnip!!
Bonds are relatively similar to Mortgage Backed Securities (MBS). The reason that’s important is because there is a relationship between stocks and bonds that typically affects mortgage interest rates: When stock prices are up and doing really great, bonds are low, and so mortgage interest rates will be high on the high side. When stock prices are lower and not so great, bonds prices are high and mortgage interest rates tend to be lower.
But NOW, like literally right now in 2020, the world is crazy. We have this fun little Coronavirus circling the globe, deflation happening in Europe, and as a result, we’re seeing global investors purchasing bonds. That’s keeping bond prices high, even though stocks are ALSO high. But since those bond prices are healthy, our mortgage interest rates are at historic lows! So even though things are a little nutty, this is great news for people seeking mortgages.
You may have also heard that we have a housing crisis again… but I can tell you that this is NOT a housing crisis like we saw in 2008. That had to do with unstable banking practices. Since then, banking is far more conservative in an effort to prevent the problems we saw in 2008. Now the “crisis” is a lack of inventory. There is not enough supply to meet buyer demand. We have a sellers market in many cities across the county. But this should not prevent you from investing if you are ready.
The term sellers market makes many buyers run for the hills. I can’t tell you how many times I’ve heard “well I’m just gonna wait till the market crashes”. I get it, one would think it makes sense to wait for a home price to be lower. But with historically low interest rates, it actually doesn’t. A lower interest rate on a higher price will actually SAVE you money in the long term. (and this is exactly why time IN the market is more important than timing the market).
Let’s talk about the economics of this. I’m going to compare two loan amounts at different interest rates to show you how this actually affects your investment:
30 Year fixed rate loan
180k at 5% = $966.00 monthly payment
200k at 4% = $954.83 monthly payment
150k at 5% = $805.23 monthly payment
You may look at this and see that your monthly payment is 150 dollars lower, BUT, you also have lost $50,000 in purchasing power. We would have to have another recession for the market to drop that dramatically.
And we’re only talking about the difference of 1% in this example. The rates we are seeing right now are actually far lower than the rates we saw in the early 2000s. I truly believe it makes sense to purchase when you are ready. Regardless of whether or not it’s considered a sellers market.
And this advice holds true with the stock market as well. Take this to the stock market, retirement, etc. Many people choose to wait thinking that prices will drop, and THAT will be the time to invest. But instead, people who build great wealth (like Warren Buffet) use a strategy called “Dollar Cost Averaging”. This means that you divide up whatever the total cost of the investment would be today over a period time, and then always put that divided amount towards the investment.
Doing this means that no matter what fluxuations happen in the market, your cost is averaged out over time.
So bottom line- consistent investing over long periods of time is the safest bet for your money!!
And one final note: I talk about this, and all this market related in my Smart Cents podcast! Text “Lizy” to 21000 to subscribe!
Lizy Hoeffer NMLS ID # 260183. AZ LO-0913409 I am authorized to conduct business in the state of Arizona. All loans subject to underwriting approval. Certain restrictions apply. Call for details. THIS SITE IS NOT AUTHORIZED BY THE NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES. PHONE NUMBERS DISPLAYED ARE NOT FOR USE BY NEW YORK BORROWERS. NO MORTGAGE SOLICITATION ACTIVITY OR LOAN APPLICATIONS FOR PROPERTIES LOCATED IN THE STATE OF NEW YORK CAN BE ACCEPTED THROUGH THIS SITE. CrossCountry Mortgage, LLC. NMLS1925878, 3100 West Ray Road, Suite 201 Office 212, 218, 219 & 228, Chandler, AZ 85226 (www.nmlsconsumeraccess.org)
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