Why You Should Follow Trends
and Generally Ignore Real Estate Predictions
On April 13, 2017, I gave a speech at the Los Angeles
Real Estate Investment Club on "Where California Housing Prices
Are Going in 2017 ... and Why."
Early on in my presentation, I said "the trend is still up"
for California housing prices - and then one-by-one, I went over the
charts of each of my five key Vital Sign indicators to show why.
Later on, I showed the audience the chart below - which is a housing price index produced by the Federal Housing Finance Agency (FHFA) to show the movement of single family home prices in Los Angeles from 1975 to early 2017.
The FHFA home price index is revised quarterly and based on repeat transactions. That is, the estimates of preice appreciation are based on repeated valuations of the same property over time. Therefore, each time a property "repeats" in the form of a sale or refinance, the price appreciation (or depreciation) since the prior sale/refinance period
The above chart shows two things: (1) That L.A. housing prices were still in a
rising trend through the fourth quarter of 2016; and (2) How accurately my market timing model was able to identify the peaks and valleys of the highly cyclical L.A. housing market
for the past 26 years.
Then Up Went a Hand with a Question
"Mr. Campbell, when are L.A. housing prices going to peak out?"
"I don't know," I replied. "The peak could occur six months from now - or years from now. We'll just have to let my timing model tell us when that is."
By the look on her face, I could tell she did not like my answer.
However she persisted: "But aside from your timing model, can you personally just give me some sort of idea when you thing the peak will occur? This year? Next year?"
I just smiled and said: "Ma'am, all I can tell you is it's coming - but I can't tell you when. Nor can anyone else predict specific events at specific times with any consistent degree of accuracy."
Goals are for Dreamers - Systems are for Winners
I then turned my attention back to the entire audience.
"Ladies and gentlemen, it's really pretty simple. Everyone is here tonight because they want to learn how to make a lot money in real estate. But that's just a goal. A dream.
.... However if you are truly serious about achieving that dream - namely you want to consistently make superior returns on your real estate investments (or any any investments for that matter) - you must have a system."
"Otherwise just buy and hold - and hope that you didn't buy when real estate valuations were too high - and that you don't sell when they were too low."
"In other words," I concluded, "without a system, luck is going to play a big role in determining your future success as a real estate investor."
It's Human Nature: Everyone Craves Certainty
I get it that people crave certainty. Everyone wants to know that some person can predict or tell them with certainty what is going to happen in the future.
Folks, the best investors don't wake up every day worried that they don't know what is going to happen tomorrow. Instead they have a plan - or what I call a "system" - for dealing with uncertainty and potential turning points in the market.
Why Successful Investors Generally Ignore
Forecasts and Predictions
Yes, people crave forecasts - even though those forecasts seldom turn out to
Here's a real world example.
The CXO Advisory Group tracked the results if 6,582 predictions that were made by 68 different investment gurus from 1998 to 2014.
Despite the fact that there were many well-known and highly respected names in the group, the average accuracy rate of he 68 guru was 47% - and 62% of the gurus had accuracy scores below 50%.
In other words, a room full of monkeys flipping quarters
would have had a better collective track record for predicting future
events than these 68 investment gurus over that 14 year time span.
What most people do when they look at forecasts is they get sucked into the story of the forecast. And often the forecasts are made by highly intelligent people that present a very convincing case as to why the forecast is likely to be right.
So to all you real estate investors out there, here's my advice for 2018 (as well as forever): Ignore the forecasts - and follow trends instead. The sooner you figure out that no one has a special crystal ball, the better off you will be.
Comments/questions are always welcome - and you can send them to Robert@RealEstateTiming.com