On December 9, 2010, we wrote an article titled “Real Estate: The Verdict Is In”. At the time, we said the following:
“As we come to the close of 2010, it appears that based on the narrow scope of sources that we’ve selected, the bottom in real estate has come and gone.”
Our call of a bottom was a bold claim at the time because of the following points against a rise in real estate:
Each of the above ideas were probably legitimate on their own and in a vacuum. However, financial markets tend to discount all of the issues that are generally known. Only a “black swan” event can take away the discounting mechanism of the markets. Thankfully, it is precisely because a “black swan” can’t be predicted that makes it out of the purview of any market analysis.
Through the passage of time, we have been able to see that our guess for a bottom in the real estate cycle was fairly close, based on the indicators presented at the time. This article will review the indicators that we cited in previous works. Finally, we’ll review the real estate cycle as described by Roy Wenzlick, which is the basis for much of our projections on this topic.
The first indicator is the Housing Starts of New Privately Owned Housing Units. Since our December 2010 article, the indicator has increased +124.44%, or more than double.
The next indicator is the Real Estate Loans at All Commercial Banks. This indicator should be clear, if banks aren’t lending then homes won’t be sold.
The next indicator plots the price of real estate for the U.S. Although there are regional differences, the general trend is the most important for assessing if a “rising tide is lifting all boats”.
Real Estate Cycle Analysis
Below we’ve included a revised and adjusted chart of Roy Wenzlick’s cycle of real estate based on the low of 2010/2011.
The above chart depicts an approximation of when the next secular low in real estate should take place (2028-2029). As our goal is to observe and identify the low, we don’t place the same emphasis on the perceived peaks, since the upside usually takes care of itself.
Already, the real estate market has experienced a 4-4½ year recovery from the 2010 low. It is at times like these that we should see a cyclical (intermediate or short-term) decline in the real estate market which would coincide nicely with a economic recession and stock market decline. However, we’d advise against taking the stance that the real estate market is under threat of a secular decline like the 2006 to 2010 period.
Roy Wenzlick had advocated that real estate runs on an 18⅓ year cycle. In theory, a half cycle should last approximately 9 years. This fits well with 4½ years as being the middle of a 9 year cycle. However, if we look at the cycle from the last low, the run to the peak lasted approximately 14-15 years with the decline lasting only 3-4 years.
Along the same lines of the 18⅓-year cycle not necessarily being evenly split in half, we should point out that the last real estate peak was graphically represented in the period of 2001-2002. Instead, the last peak in real estate occurred in 2006. This is a common phenomenon in markets, where the decline lasts ¼ to ⅓ of the previous rise. The point that corresponds the most to the 2006 peak is the year 2024. We’ll see if there is any correlation to the two periods going forward.
Conclusion
Critics of the current housing recovery often cite that the charts displayed above have not exceeded the prior peaks or that the entire rise in the market is due to the actions of the Federal Reserve. Unfortunately, such views are often myopic as they ignore the nature of markets to recover on their own.
Among other things, in order to achieve the previous market highs you would need a bubble economy to replicate the changes that would bring us to the prior elevated levels. Regarding the Federal Reserve’s actions, we’re not convinced that Fed is driving the markets as much as it is reacting to them, as argued in our article titled “Is the Fed Responsible for the Stock Market Rise Since 2009?”.
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