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.