Understanding market conditions is critical for almost any types of investing. If you evaluate a market incorrectly, you can lose a significant amount of money. The real estate market, however, is considered a much more solid investment because it’s not quite a critical to get in or out at just the right time. Real estate is one of the few markets that you can both buy high and sell low and still make a profit. This is good, since predicting real estate markets can be tricky. Here are 3 reasons housing markets are difficult to predict.
One very interesting trait of human nature is that you are far more likely to look for reinforcement that your beliefs are true than for conflicting evidence that they are not. Therefore, you find what you expect to find. Any evidence that does not line up with what you think is true, you will discard. If you think the market is on the rise, you will actually look for evidence that reinforces that belief and discard any evidence that does not support it. Confirmation bias is one of the absolutely hardest obstacles to overcome in order to make any sort of accurate market predictions.
Statistical analysis can tell you what is, but not why it is. The why is incredibly important, however, because if a market is growing, it will stop growing as soon as the reason for growth changes. In most cases, the reason for growth in a certain market is also not singular. Growth is generally caused by a combination of factors. If you misidentify the cause of growth, you will most likely be taken off guard when it suddenly peaks and changes direction.
Comparables Are Not Always Comparable
Investors love “comps” because they provide a quick shorthand for determining the market potential of a given investment. While comps may be quick and easy to understand, however, they are not always accurate. For instance, an upscale townhouse in an area of modest single family homes may be diminished in value because of what it is being compared to. If there are no other properties in the area that are genuinely comparable, then it is hard to make an accurate assessment by comparing one property to another.