What the Charts Tell Us About Real Estate Prices
Monday, January 22nd, 2007
By Michael Lombardi, MBA for Profit Confidential
What goes up, must come down. That’s what my dad always told me about investing. It’s also what most conservative-approach investing books claim.
The oldest and toughest game in the investment forecast business is picking the tops and bottoms of markets, including stocks, precious metals, and real estate. Investment trends tend to go higher than most analysts expect because liquidity during the speculative and final stages of a bull market are a strong force to deal with. Calling the end of a market bottom is equally as difficult, as bear markets often persist until investors have all but given up on an investment.
No other form of investment, aside from stocks, has received more attention than real estate over the past five years. That’s because of the fear that a prolonged bear market in real estate would have a major negative effect on the U.S. economy.
Under the stewardship of Alan Greenspan, interest rates fell to a modern historic low in 2004. And that made investment real estate and home ownership boom. In 2005, home and investment real estate buying in the U.S. reached a frantic pace. You can call 2005 the final speculative boom year in U.S. real estate.
What analysts are asking now: Is the bear market and the worst of times now over for real estate? Most market watchers, including former Fed head Greenspan, claim the worst is over for the real estate market. My personal opinion, as a former real estate man, is that we still have yet to see the bottom in the U.S. real estate market.
Emotions and opinions aside, what do the investment charts tell us? What does the technical picture look like and what does it tell us about the future?
To answer this question, we turn to the Dow Jones U.S. Home Construction. From a level of 300 in 2003, this index climbed to 1,100 in mid 2005 (corresponding with the peak in U.S. real estate prices). By mid-2006, this index was down just below 600. Today, the Dow Jones U.S. Home Construction sits at 733 — down 34% from its peak.
In strict technical terms, after reaching its peak and heading lower, the index created what’s known as a huge “right shoulder.” Strict interpretation would suggest the index is in the process of building a second right shoulder.
What does this mean in layman’s language? If we use the Dow Jones U.S. Home Construction as an indicator of the real estate market, the housing market will stabilize over the next several months before moving lower again. We are experiencing a classic “rebound” in confidence in the U.S. real estate market — such bounces are often followed by more negative market action.
The correction in the U.S. housing market — and its potential negative effect on the U.S. economy — is far from over.
Next Post: The Number One Rule is Never Assume AnythingPrevious Post: Balancing the U.S. Trade Deficit Is No Easy Task
Tags: dow jones, interest rates, precious metal stocks, real estate market, U.S. economy, U.S. housing market
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
