No home buyer wants to be the sad buyer in our chart below who bought their house at the absolute peak of a real estate bubble, just before prices crashed.
The chart below shows an index of house values in Phoenix Arizona.
The conventional wisdom is that it’s impossible to predict when house prices are going to decline so home buyers shouldn’t worry too much about it. While this type of thinking may hold true in the stock market where stock prices respond instantly to changes in demand – and can drop 20-30% in a single day – which makes them truly unpredictable, the same is not true about the real estate market.
House prices do not adjust instantly to changes in demand and they do not drop 20-30% in a single day. In fact many real estate economists (including Karl Case here) have found that unlike the stock market, declines in the real estate market typically follow a very predictable pattern.
Understanding this pattern can help us avoid costly mistakes.