“You Can’t Time The Market”

October 20th, 2009 by Potato

“You can’t time the market” is a statement that’s generally true for the stock market — it’s a highly liquid, fairly efficient market full of professionals who all have roughly the same access to information about the future of the market. The shares traded are identical, so as soon as one is traded at a new price, effectively they’re all re-priced, and they’re only traded with the goal of making money — nobody hangs onto a share because it’s what they owned when their daughter took her first steps or because it’s customized just for them. The theory says that any information that could affect the future value of stocks is priced in in short order, so you can’t successfully time the market — getting out before a crash, or in before a surge. At least, not consistently enough to make money. And for the stock market, I think that’s probably true.

The housing market is a different beast entirely. It’s composed of units which are not 100% interchangeable. It’s highly illiquid. The participants are to a very large extent non-professionals who are poorly or even mis-informed about the state and future of the market, and have emotional entanglements to their properties on top of that. Each transaction is negotiated in secret, with pricing details only released some time later — so when one is traded at a new price that incorporates information about the future, it doesn’t necessarily affect other sales.

So when I come on here and piss and moan about how the housing market is getting ridiculous, and how I really fear that there will be a crash/correction to come in the next few years, and people say “you can’t time the market”, well, that’s not entirely true for the housing market, since it’s not as efficient as the stock market. It is true that I can’t say “next June, a month before the BoC’s promise to keep rates low runs out, the market is going to tank 8.53%”. It’s true that I’ve been bearish for over 2 years now, and aside from the beginnings of a correction last fall (a tailspin broken by the low rates), Armageddon has not visited Canadian homes. So in that sense the timing is hard. Getting the exact “when” down is very difficult. It’s certainly not precise. But it’s enough to know that we’re near the “top”, even if we don’t know when the “bottom” will come — the “when” is often not as important as the “how much”.

For the stock market, there is no “renting” of stocks. There’s no set of metrics that tell you reliably when the market is over- or under-valued. P/E ratios, bond yields vs dividend yields, these might be useful clues, but nowhere near as handy as the rent-vs-buy calculation. If a landlord can’t buy a place and rent it out at a profit, then something has to change. It’s also hard to come across telegraphed messages like this:

But if home prices keep bubbling, the central bank might raise rates

If the real estate market momentum does not moderate in the coming year – “or worse still, if price growth accelerates – it could lead to an earlier and more substantial tightening in policy than currently anticipated,”

Not often you’ll see hints from that the central bank is out to keep a bubble under control.

Of course, interest rates are a blunt instrument. There are many interconnecting factors: the dollar is already getting too high vs the USD, hurting our exports in a tenuous recovery. The central bank wouldn’t want to start raising rates to control the over-heated housing sector just to doom the business sector. Even within the housing sector, urban areas have the fever the worst; the Maritimes and more rural areas aren’t too far off of realistic valuations. There are more precise ways to throw water on the housing market, such as taking away 5%-down 35-year insurance.

In all seriousness, I don’t think people have to worry about the BoC jacking rates before their self-imposed timepoint of next summer, unless non-house inflation also takes off. However, the fact that this is on the BoC’s radar at all should be troubling. We are, IMHO, near the top of the market, even if the “when” of the peak may still be another year or two down the road.


2 Responses to ““You Can’t Time The Market””

  1. Michael James Says:

    You make a good case that timing the real estate market may be possible for knowledgeable people. However, when you say that there is no renting of stocks, that’s not really true. Short sellers do rent stocks. This situation is different from house renting in significant ways, but stocks are rented.

  2. Potato Says:

    LOL yes, and originally I did have a parenthetical “(except for shorting)”, but that is a completely different beast… You need a place to live, and rent is the “risk free” cost of living. You need a place to park your money, so maybe GICs/government bonds are the analog… but I suppose I can’t draw too many parallels between financial markets and other markets.

    Unsurprisingly, the BoC announced today that they’re keeping rates at near zero, so I’m going to have to wait longer for my long-prophecized housing correction to arrive.