On September 12, 2016, we assess the real estate market. In this update, we’ll reconsider the points that we made to determine the progress that has been made with our analysis. There are some surprises as we go through the limit info that is tracked.
In this assessment, we track the Housing Starts of New Privately Owned Housing Units. At the time of the September 2016 review, we said the following:
“The latest trend from September 2015 to the present appears to show topping out action as the Housing Starts data seems to be running out of steam. Additionally, the dotted red line in the chart shows the Dow Theory halfway point at which either the market booms higher or stalls & stutters before declining substantially, relative to the most recent rise.”
So far, the data has fallen in alignment with our claim of topping out action, as seen in the chart below.
Our updated analysis has drawn a red box around the area of most interest to us (labeled topping/breakout range). We believe that this zone will be later seen as a defining point in the trending range either higher or lower. Overall, a decline from current levels would be healthy while a breakout to the upside would be in complete alignment with the cycle of the real estate market. The more time that passes with the Housing Starts in this range the more likely the breakout to the upside, which will resemble periods like 1993, 1998, and 2002.
On the topic of Real Estate Loans at All Commercial Banks, we said the following last year:
“…the Real Estate Loans at All Commercial Banks which has made a tremendous recovery from prior lows set in 2010. The pace of the gains in this indicator suggests that a slowdown should be expected. An equivalent period for comparison is from the 1991 low to July 1995 intermediate peak. We may be about to replicate the same action and this is worth looking out for.”
Based on the accompanying chart, the Real Estate Loans at All Commercial Banks has somehow managed to do exactly what we had anticipated.
Our interpretation of the current decline is that we wouldn’t be surprised to see a fall to the level of the 2012 peak as there is considerable correlation with the 1993 low. However, the current “adjusted” lower levels, so far, are in line with the decline from the 2012 peak to the 2014 low. None of the declines so far should be equated with panic levels similar to the 2006 to 2011 tumble.
The final indicator that we track from the September 2016 article is on the Housing Price Index. At the time, we said the following:
“What stands out about this indicator? First, the recovery has been complete. The market has achieved and exceeded the prior levels set in 2007. It is times like these when what is remaining is either a runaway boom or a bust. Worth noting is that the rate of increase has already topped out and has started to trend lower. this does not mean the indicator is going down. However, the pace of increased has slowed and could turn negative.”
Yes, it is easy to say that the move is either up or down. However, upon review, it appears that the rate of increase suggests that a runaway boom is in the offing, at least based on the updated chart below.
Overall, we believe that the HPI has some ways to go on the upside. Our best indicator of a coming decline should be a decelerated rate of growth. The chart below shows the year-over-year rate of change with “choke” points at +19.50% and +17.28% and the current level at +19.12%. Rising or falling above the “choke” points will indicate the prevailing trend going forward.
Below is our take on where we might be relative to the Roy Wenzlick Real Estate Cycle as previously cited.
Although we show the cycle at or near a “peak,” the current stage is a phase of accelerated increases on the way to a top in the real estate market at or near the 2024 date. Keep in mind that the economic, stock market, and real estate swings between the prior period low from 1991-1992 to the top in 2006 are going to be different. Overall, we see short-term lows in real estate within the overall rising trend to 2024.