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The Problem with Real Estate Predictions

When it comes to real estate, there are no shortage of predictions. But in spite of a desperate desire to know what’s coming, and various methods employed over thousands of years, the fact remains that even the very smartest people get it wrong, again and again. But that isn’t even the biggest issue. Here’s the real problem with real estate predictions.

What to Remember

No one has a crystal ball, and even the most educated guesses are just that—guesses. If you look at history, the events that have sudden, major negative impacts on the market truly came out of nowhere—just consider the coronavirus, fraudulently rated collateralized debt obligations, earthquakes, Savings & Loans junk-bond bankruptcies, and the Yom Kippur War/middle-east oil embargo, to name a few.

What’s more, past performance is no guarantee of future results. In other words, what happened in previous downturns and recoveries may or may not apply to today’s circumstances. So while it’s important to learn from the past, it’s not a guarantee of what’s going to happen today or in the future.

It’s also import to consider the source of a prediction. Many, if not most, are made by those who have vested financial, political or emotional interests—sometimes subconscious—in convincing people that they’re right. The more confident someone is in their prediction, the more likely they are to have a vested interest—and to be wrong, since bias skews any analysis. Quick note here, that it’s illegal in California for a real estate agent to consciously give advice based upon their own financial interests and if not outright illegal it is certainly unethical in Nevada. Still, it happens.

The Best Advice

Almost always, the predictions that are most likely to get things somewhat right are usually the most general. In 2018, Charlie Munger, vice-chairman of Berkshire Hathaway, was quoted in The Wall Street Journal: “For hundreds of years, real estate and financial markets have moved in cycles, and presumably they will continue to do so. But I can’t predict their timing, their specific causes or details, and the magnitudes of their ups and downs. Generally speaking, the most reliable strategy seems to be to buy a home for the longer term, one whose monthly cost is readily affordable for you, ideally using a long-term, fixed-rate loan (refinancing to lower rates when that option makes sense), while keeping an adequate financial reserve for emergencies. And then resisting the urge to use one’s home as a refinance-ATM to buy stuff during times of significant appreciation,” he said. “Everybody talks as if they know what’s going to happen, and nobody knows what’s going to happen.”

If you’re desperate for insider information, keep in mind that the best economic forecasters have large amounts of humility, constantly question their calculations and tentative conclusions, try to adjust for personal bias, and cover any discussion of possible outcomes in caveats. If you’re looking for someone like that, I’m happy to answer your questions and offer insight.

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