Market Volatility in Real Estate

By Steve Gillman - 2010

We all recognize market volatility in things like stocks, since they are quoted daily and the price of a given stock can easily change by 5% or 10% in a day. We miss the market volatility in real estate however. Let me explain...

What if you had to sell your house today? Would that make you a little nervous about getting the best price? Of course it would, because on any given day you might not have the best buyers for your property in town. If you absolutely had to sell today you might have to dump it on an investor for 20% less than you could have sold for with time.

This shows us that the value of real estate actually changes from day to day--every bit as much as stocks do. We don't see it because we do not sell every day, nor is there any way (currently) to see what offers might be made for your home on a given day. Suppose your home is "worth" about $190,000 given enough time to sell. If no interested buyers are around right now and you had to sell today or even this week, you might have to drop the price to $150,000 to get a sale. If the right buyer is in town looking next week, you might sell for $200,000 at that time. The true cash value is $150,000 one week and $200,000 the next? That's volatility!

Now, some will protest, "but you don't have to sell!" That's true, which gets us back to those other volatile investments--stocks. Is the value of a stock selling for $23 really $23? If you are fairly certain that it will be priced at $40 sometime in the coming year and you can wait to sell, that suggests a higher value than $23. Buy that stock!

Of course there are no guarantees--not in the stock market nor in real estate. Your house might be appraised at $190,000 based on finding a buyer within six months or so, but then by the end of six months it could be worth a lot less too. Real estate values can drop--as we have all learned--just like stock prices.

I wish I could offer something more useful for you to do with this idea, but mostly I just find it fascinating that the cash value of a house might jump up and down by 25% daily, and yet we sleep well because we are fortunately ignorant of these daily gyrations. With stocks we get to sweat as we watch them rise and plunge in price from day-to-day and month-to-month.

I can offer this bit of advice: Focus on the longer-term time frame to the extent possible, and use that market volatility to your advantage. With stocks this means buying solid profitable companies when the stock price is beat down by events that are not entirely relevant to the long-term outlook. With real estate it means looking for opportunities to buy cheap from those who need to sell fast and don't have other good buyers interested. If you buy in an area that is growing and pay less than the cost to build, you can't go too wrong. Then take your time selling someday to maximize your profit.

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