Dead Cat Bounce or Buying Opportunity?


When a cat falls, its innate sense of balance allows it to land on its feet, bounce up and prance away without ever losing that smug look of “coolness” on its face. When a dead cat is dropped it too will bounce up only to come crashing back down with a resounding thud. That explains the Wall Street warning that you need to watch out for a “dead cat bounce” and not be fooled by what looks like a turn in the direction of the market. That Wall Street expression can be applied to real estate and other investments as well. Markets that seem to be turning around may just as quickly reverse and resume a downward trend.

Speedboat vs. Supertanker

Due to its highly liquid nature, the stock market can move sharply in one direction only to seemingly stop on a dime and reverse course and then move just as strongly in the opposite direction with the agility of a speedboat. However the overall trend does not change as swiftly and the market will tend to resume the course it had been following, thus the dead cat bounce. Without that inherent liquidity the real estate market changes direction much more slowly, more like a supertanker. But that doesn’t mean that it can’t have a phony trend change, or dead cat bounce, of its own.

 Lately we have witnessed huge swings in the stock market within the same trading day. This volatility will continue until a new sense of direction is established. The short-term day traders can win or lose plenty of money in these times. Those holding long-term should be fine in the long run but is indeed scary if you are attempting to sell.

The Trend is Your Friend

Another Wall Street expression is that the trend is your friend, go against it at your own peril. Too many investors try to anticipate a change in the market only to get burned when they are proven wrong. Before committing to an investment strategy you need to be sure that the conditions are right for that kind of approach. This is a tough time to be betting on any particular direction.

 One advantage of real estate is that it can provide income regardless of the current market trend. If you have rental properties that provide positive cash flow it doesn’t really matter which way the market is moving. If you are a long-term investor and you are making money every month, does it really matter which way the market is heading? But if you are looking to buy or sell the trend is very important, you want to buy when get the prices are low and sell when they are up.

Is Change in the Air?

Many real estate markets are showing some encouraging signs of life. Las Vegas is actually experiencing multiple offers on foreclosed properties, which are frequently being sold for more than the asking price. Investors sensing that the market has approached a bottom are returning in numbers large enough to be noticed. Sales have been steadily rising month by month and there is a feeling of hope.

 However there are problems. The credit crunch has caused a lot of difficulty in getting deals to close. Buyers in high rise condo and hotel/condo projects who were pre-approved and placed deposits on units prior to construction are having problems securing loans now that the units are ready. The recent end of a popular down payment assistance program will have some effect on demand going forward as well.

So is the trend changing or has the dead cat bounced only to come crashing back down?

If all the economists in the world were laid end to end, it wouldn’t be a bad thing. – Peter Lynch

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  1. Barbara Grassey on

    Good article, especially as it applies to the current real estate uptick. There was a moratorium on short sales for April, May and June while some banking issues were sorted out. People are rejoicing that sales were up in August and September, but the increase is just the clean up from those three months.

    If this uptick is based only on sales figures and not on the type of sales, then it is indeed a dead cat bounce. In our area of Florida, and maybe all over, the local Board of Realtors includes foreclosure and short sales in its count and then proudly touts that sales are going up. Obviously, a foreclosure is a sign that the market is still in trouble, not a sign that it is doing better.

    Conventional financing is unavailable for most civilian buyers and that will keep them out of the market. Cash buyers are being cautious but are coming back into the market. Investors who know how to structure owner financing will be the real winners. Teaching the general public about owner financing may be the best way out of this real estate downward spiral.

  2. I like a lot of your ideas in this blog, especially the speedboat vs supertanker analogy. Rental property is a great investment but is also affected by several factors which could inhibit expected positive cash flows. Look forward to your next one!

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