Category Archives: real estate

California Real Estate: February 2018

Posted on February 24, 2018 by | Leave a comment

Two indicators of the California real estate market that we’re tracking are the median price of existing detached homes and the violations of California regulations for real estate licensees, agents, brokers and non-licensed individual/firms involved in real estate transactions*.  Below we have the monthly and 12-month moving average data for these two series from 1990 to the present.

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Posted in California Real Estate, real estate

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Housing Prices About to Explode Higher?

Posted on January 24, 2018 by | Leave a comment

This was the headline found on ValueWalk.com.

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If you like a rationale for what might happen in housing then this is a pretty good explanation.  However, we’ve long stated this fact.  Based on the data that we track, all indications pointed to the coming boom in housing and real estate prices since our December 9, 2010 article titled “Real Estate: The Verdict is In.”

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The above chart is from our October 2017 Real Estate Review, in which we said the following:

“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.”

This mirrors the ValueWalk article which states, “The valuable part of this chart is the right side which shows that millennials are starting to buy homes now and should boost the housing market until 2026.” However, our estimate for the peak near 2024 was first issued on October 5, 2012 based on the work of Roy Wenzlick and was a revision to our initial 2028 estimate.

There are some factors that go unaddressed in the ValueWalk article however, we believe, as we’ve stated since December 2010, that the trend is your friend.

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Posted in real estate, Wenzlick

Homebuilder Confidence at 18 Year High

Posted on December 21, 2017 by | Leave a comment

In an articled titled “America's homebuilders haven't felt this good since 1999” found on Yahoo!Finance dated December 18, 2017, it is noted that homebuilders confidence is “…now at a higher level than it was at any point during the housing bubble.”  Does this mean that a crash in the housing market is coming?

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To clarify whether a crash is coming, we’ve taken the data that is referenced in the article and laid bare the elements of a real estate market cycle.  In the article it is said that the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) “…hit an 18-year high of 74, topping expectations for a reading of 70 and well above last month’s reading of 69.”

As we’ve pointed out, based on the work of Roy Wenzlick, there is an approximate 18-year real estate cycle for peaks and troughs.  When we look at the HMI chart (full cycle in red), we can clearly see that major cycle lows have an 18 year period of separation.  While this is only a coincidence, it fits well with the work of Wenzlick who confidently shows this cycle (1795-1974) in his writings from 1930-1974.

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Real Estate Review

Posted on October 21, 2017 by | Leave a comment

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.

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Posted in cycle analysis, real estate, Wenzlick

REIT: Index Crash from 1972-1979

Posted on May 22, 2017 by | Leave a comment

Few are aware of the colorful history of the real estate investment trust industry.  Much of the mystery in the industry has to do with changes to company names and legal definitions of what a REIT actually is, thereby rendering the history to the realm of the forgotten.

A quick look at the REIT Share Price Index in 1979 (Brody, Michael. Sounder Ground. Barron’s. May 21, 1979. page 4.) should shed some light on an industry group that, from 1960 to December 1971, had experienced two jarring routs of –60% and –80%.  The REIT Index below has not survived to the present as a majority of the companies (greater than 80%) simply don’t exist after their failure/bankruptcy or forced mergers.

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The reasons for the decline in the period from 1972 to 1974 are many. Surprisingly, investment analysts at the time were simultaneously arguing that falling and rising interest rates were the threat to the REIT industry.  As we enter a secular rising interest rate environment, REIT investors should check the foundation that their investments are build on.

see also: U.S. Realty: 1921-1939

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Posted in crash, real estate, REIT

Musings on Real Estate

Posted on March 26, 2017 by | Leave a comment

As investors, we’re firm believers in preparing for the worst case scenario.  For us, the definitive worst case scenario is found in the markets from 1921 to 1932, covering the early stages of the “Great” Depression.   We believe 1921 to 1932 should be examined and re-examined to understand possible risks and remedies for our current perspective on markets.

In our recent musings, we found that the rent data from 1914 to the present at the Federal Reserve Bank of St. Louis had a minor quirk, some information was missing in the sweet spot that we’re most interested. Below is our take on the data and some minor insights.

Again, looking at the data related to the CPI for All Urban Consumers: Rent of Primary Residence (CUUR0000SEHA) on the St. Louis Federal Reserve website, we can see monthly data ranging from 1914 to the present.  However, the data in the period from 1915 to 1940 has many gaps that obscure what happened to rental prices (when attempting to chart).

The chart below is the maximum view of the data from 1914 to 2017.  The black boxes show, or rather don’t show, the data that is missing from the period in concern (also from 1944-1947).

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Although there is some data interspersed from 1915 to 1940, there isn’t enough to generate a complete graphical representation of the period.  Below is the charting of the data for Residential Rents in St. Louis covering the period from 1875 to 1944 in work from Roy Wenzlick’s Real Estate Analyst.  We’ve highlighted the period of concern in red.

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We wanted to know how accurate Wenzlick’s St. Louis residential rents compared to the national data provided by the Federal Reserve.  To do this, we took the 1914 data set and peg the percentage change in Wenzlick’s work to the missing data at the Fed through to 1940.  The result of this is displayed below:

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In the red are the data points based on what would have happened if the starting point of December 2014 Fed data had the same rate of percentage change as Wenzlick’s graphical representation from 1914 to 1940.  In the blue, we have the original data set from the Federal Reserve.  We’ve extended the available Fed data from the prior period to fill the gaps.

Interestingly,  the percentage change from peak to trough in both data sets are fairly close with Wenzlick’s data declining –34.21% and the Fed data falling –38.43%.  The January 1923 and September 1924 peaks are consistent with our previous examination of other commodities.  For example, in our “1925 to 1932: A Question for Precious Metal Investors”  article, we see a 1925 peak in precious metal stocks with the decline ending in 1932.

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As best we can tell, the gaps presented in the Federal Reserve data generally coincides with the data offered by Roy Wenzlick.  In addition, the data from both sources on the general direction of rents coincides with other commodity related declines from the period of 1923 to 1932.

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Posted in 1929, 1932, real estate, Rent, Wenzlick

Real Estate Review

Posted on September 12, 2016 by | Leave a comment

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.”

Since that time, the real estate market has experienced what we’d consider to be a recovery.  This is a follow-up on the indicators from that 2010 article to see how far along we have come in the current recovery and where we might expect the market to go from here.

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Posted in cycle analysis, real estate, Wenzlick

Real Estate: Cycle Analysis

Posted on September 23, 2015 by | Leave a comment

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.

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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.

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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”.

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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.

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Posted in Black Swan, cycle analysis, Dakin, Dewey, real estate, Secular Bull Market, Wenzlick

Review: Bank of Montreal

Posted on June 13, 2014 by | Leave a comment

Contributor C. Cheng Asks:

“What are your concerns regarding the housing bubble forming in Canada and it’s potentially adverse effects on BMO?”

Our Response:

The timeliness of this comment regarding Bank of Montreal (BMO) is critical.  On June 7, 2012 (found here), we posted an Investment Observation on Bank of Montreal which was one of our leading considerations as an investment opportunity.  Keep in mind that our interest in BMO came after a 14-month declining trend in the stock’s price.

At that time we said the following of BMO:

“We are reticent to recommend any kind of banking institution due to the many unexpected risks that occur outside of the purview of regulators and accountants.  However, Bank of Montreal is a reasonable banking investment if bought at the right price.  We believe that the right price begins at $51.80 and below.”

Unfortunately, BMO never fell below $51.80.  In fact, the day that were did our write up on BMO it only fell below the $53.57 price on the five subsequent trading days immediately afterwards, with the lowest price being $52.15 on June 11, 2012.

At the moment, BMO’s stock price has retested the previous high set in November 2013.

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If there is a concern that Canadian real estate is in a bubble then it would be wise to sell only the principal in BMO while leaving the profits to compound.  This would eliminate the guesswork associated with determining if there is a bubble.  The remaining funds would be allowed to compound at a 5.50% rate until BMO has sustain a similar decline in price from April 2011 to June 2012.

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Posted in BMO, commodities, Dow Jones-UBS, Peso Crisis, real estate, Richard Russell Review, S&L Crisis

Q&A: Cycles and Their Use

Posted on February 11, 2013 by | Comments Off on Q&A: Cycles and Their Use

Reader Kerry Comments:

“I’d like to pick up on the problem that untrusting investor has identified ‘The problem is that we have never seen one yet that has much accuracy or predictive ability to any substantive degree or within any reasonable time frame. As such, it becomes a ‘big gamble’ to take action on the predictions of any such cycle models or theories.’

“I like cycles myself, but I struggled with cycles that appeared great but then tended to be slightly off when forecasting the future, and therefore are difficult to use in trading. This led me to conduct my own research that has culminated in my own cycle work and the discovery of a 2.2/4.4 year cycle. I am of the opinion that the secular bear is about to strike back in the second half of 2013 as the 17.6 year stock market cycle continues until 2018, when the next great bull market will properly begin.”

Our Response:

Implicit in the discussion of cycles (observations of the past) is the eventual application of the analysis for the future. Unfortunately, some who do the best research on the study of cycles have the worst record of application. Our view is that we’ll be wrong about the actual cycle range and the application of the timing. Therefore, we are never disappointed about the outcome.

However, as students of the market we are constantly working to find quality research on the topic. Already we know that Charles Dow’s work on stock market cycles is useful when applied with skepticism and moderation.

As an example, based on the Wenzlick model for when real estate would bottom (18.3 years) it suggested that the low would be in 2009. In our January 2010 article titled “Real Estate: The Bottom is Calling” we said the following (found here):

“…tendency has been to include the years 2008 and 2010 just to play it safe.”

We understand that the markers for a bottom or top are like sand dunes in a desert, they are constantly on the move. This does not negate the cyclical nature of market moves, it just means that flexibility is required when thinking on the topic of cycles.

We followed up the January 2010 article with what we believed was the definitive call in the real estate bottom based on the work of Wenzlick. In a December 2010 article titled “Real Estate: The Verdict is In” (found here) we felt the title said it all.

Naturally, we could have been completely wrong and in select markets, a bottom may not be in at all. However, we’re trying to think in terms of the broader context. Based on the metrics that we tracked, real estate did hit bottom on or fairly close to the December 2010 low as highlighted in our follow-up article titled “Real Estate: A Sustainable Rise” (found here).

Within the general context of “being accurate” on our call of real estate based on the cycle work of Wenzlick, there are a couple of MAJOR ASPECTS THAT WE DID NOT GET RIGHT and that is the recommendation and investment in homebuilder stocks and the purchase of the home in our specific county.

First, we did not recommend homebuilder stocks because we simply didn’t think of it. That was a huge missed opportunity as shown in the chart below of the SPDR S&P Homebuilders ETF (XHB).

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Second, our purchase of a home in September 2009 was not at the low point, for our region of the country, as real estate prices had bottomed in January 2009.  By the time of the 2009 purchase, median prices for our county had increased by +40% as seen in the chart below (www.car.org).

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Also, as seen below, existing home sales for our county bottomed a year after the home purchase.

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However, the overall point is that we're closer to the low in the respective cycles rather than near the peaks in the cycle with out investments and purchases.  Additionally, we’re taking the lessons for the current cycle and hoping to apply it to the next cycle move.

We also have cycle targets for gold and interest rates which have been fairly accurate. Do we go “all in” on the cycle turns? No. However, we do factor in the chance that the change in the cycle could exert its force on our best intentions.

Again, the emphasis should always be on skepticism and moderation when attempting to apply cycles for predictions of the future.  With this in mind, a good analyst will hedge their commentary on cycles and allow for a wide margin of error. After all, we’re all students of the market (real estate, jobs, stocks, cars, groceries etc.) and therefore open to changing conditions.

As mentioned earlier, we’re always factoring the downside risks and acting accordingly (most of the time, except when our subscriber SD pointed out the awesome buying opportunity on DELL from our own watch list at the low…Great call SD!).

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Posted in cycle analysis, Q and A, real estate

Real Estate: A Sustainable Rise

Posted on September 9, 2012 by | Comments Off on Real Estate: A Sustainable Rise

The cover story for the September 10th weekly magazine Barron’s is on the recent surge in real estate and how the rise in property prices is no fluke.  In the article by Jonathan R. Laing titled “Happy at Last,” readers are given a cautiously optimistic assessment of what has already been a well established trend in the real estate market.  A distinction in this article is the confidence with which many professionals believe that the current rise in real estate is sustainable for the foreseeable future. 

We agree that real estate will have a sustainable trajectory upward as we outlined in our December 10, 2010 article titled “Real Estate: The Verdict is In” (found here).  We believe that the clear reversal of the indicators that we discussed at the end of 2010 has proven that the real estate market has bottomed.  The following is a review of the indicators that we track that have definitively shown that the direction is up.

As can be seen in the chart below, U.S. housing starts bottomed in January 2009 and started to base over the next 2 years.  Two months after our December 2010 article, housing starts began to increase at a healthy pace.

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The broad basing pattern in U.S. housing starts and the relatively mild increase, as compared to the 1991 bottom, seems to indicate a more realistic view on expectations for real estate going forward.

The next chart that we find useful for determining the direction of the real estate market is the real estate loans at all commercial banks.  When we published our December 2010 article, we said that the bottom had occurred in April 2010.  In fact, the actual bottom took place in April 2011 as shown below.

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The real estate market cannot thrive in an environment where lenders are unwilling to lend.  Tracking the real estate loans by banks is instructive as to what the direction in might be.  Our assessment of this indication suggested that on a relative basis, the declining trend was at, or near, an end.  The dramatic increase in lending since early 2011 has helped push select real estate markets higher.

Much of the research analysis that we do on the topic of real estate is based on the work of Roy Wenzlick.  If there ever was a scientifically accurate approach to analyzing the real estate market, Roy Wenzlick perfected it.  Anyone who read his newsletter, The Real Estate Analyst (published from 1932-1974), would have thought that Wenzlick was strictly a statistician.  However, while Wenzlick was a compiler of significant amounts of data on real estate, he also believed that the market for properties ran on a clearly defined cycle.  On each chart above, we have indicated Wenzlick’s last estimated low for real estate based on that cycle.

The chart below illustrates the importance of considering Wenzlick’s estimate of the real estate cycle because it isn’t the rise that we’re interested in as much as when the next decline begins and when the bottom might occur.

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The real estate cycle that Roy Wenzlick adheres to pointed to a low in 1991 and a low in late 2009.  In the Federal Housing Finance Agency’s House Price Index (HPI) for the nation, we can seen that 2009 was not quite the end of the decline for real estate.  Knowing that all cycle analysis is a rough estimate, at best, we hedged our view to include the possibility that the bottom would occur as late as the end of 2010.

While the outlook for real estate prices appear to be up for an extended period of time, the stock price of homebuilders like Beazer Homes (BZH), Hovnanian Enterprises (HOV), Toll Brothers (TOL), DR Horton (DHI), Pulte Group (PHI) and Lennar Corp. (LEN) are expected to rise and fall in anticipation of cyclical (short-term) trends.  We continue to recommend considering any of these companies, including homebuilder ETFs like S&P Homebuilders (XHB), when they are within 10% of their respective 52-week lows.  We believe that a revisit of the June 2012 lows will be the prices to watch for as the next buying opportunity for these stocks.

Barron’s is on the right track in terms of where the real estate market has been. However, the fact that Barron’s is favorably highlighting this trend indicates that there may be a short-term reversal in many of the widely followed indicators in the industry.  This suggests that there are immediate long-term opportunities for homebuyers while real values in homebuilder stocks will arrive six to twelve months from now.

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Posted in real estate, Wenzlick

Real Estate: The Verdict Is In

Posted on December 9, 2010 by | 2 comments

On January 6, 2010, we wrote an article titled "Real Estate Bottom is Calling". At that time we indicated that, based on the cycles as presented by Roy Wenzlick along with supporting data from the Federal Reserve Bank of St. Louis, the real estate bottom was in or that it would be registered within 2010.

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. Below we show a chart of housing starts which appears to have registered a bottom in the month of July 2010.

In the next chart, we have the real estate loans of all commercial banks. This chart also shows that the bottom did occur in the month of April 2010.

Again, the premise of our assertion that real estate would hit bottom is primarily based on the fine research of Roy Wenzlick, author of the Real Estate Analyst. Wenzlick proposed that real estate goes through 18.3 year cycles. Such cycles can be used to estimate the approximate bottoms or tops in the market for relatively accurate timing on when to buy or sell real estate.

Below is a chart that appears to show real estate hitting bottom in 1973. If we were to added 18 years to 1973 then we’d get a bottom in the real estate market in 1991. In fact, 1991 was the last major bottom in real estate. Adding 18 years to 1991 gives us an expected bottom in 2009. As stated in our article of January 6, 2010, we play it safe by including 2008 and 2010 to our expected bottom in the real estate cycle.

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If we add another 18 years to the 2010 bottom that we expect that we’ve passed, we arrive at the year 2028 as the next bottom. This coincides with our inflation cycle peak that is expected from 2028 to 2030 (see right hand column). We arrived at our inflation cycle from the work of Dewey and Dakin’s book Cycles, The Science of Prediction. In their book, written in 1947, Dewey and Dakin proposed that the next peak in wholesale prices would occur in 1979 and the next trough would occur in 2006. The 1979 target was off by one year while the 2006 target is off by 2 or 3 years.

Source: Edward Dewey and Edwin Dakin. Cycles, Science of Prediction. 1947.

Despite the discrepencies in the 2006 estimate for wholesale prices, the stage has been set for some interesting times in the coming years. Based on the indicated sources above, we feel that real estate has a six to nine year stretch of rising prices or "trading" in a range and decreased foreclosures.

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Posted in Dakin, Dewey, real estate, Wenzlick

Real Estate Bottom is Calling

Posted on January 6, 2010 by | Leave a comment
The great real estate analyst Roy Wenzlick may have called the bottom in real estate again...for the 10th time in a row for the last 78 years. Although he passed away in 1989, Roy Wenzlick gave significant credibility to the idea that real estate has an 18.3 year cycle. Wenzlick compiled data on real estate in St. Louis as well as the rest of the nation from 1932 until 1973 in his publication The Real Estate Analyst.In the diagram below, you will see Wenzlick's 18.3 year cycle displayed from 1795 until 1973.
 
It is important to note that if you add 18 years to 1973 you get the year 1991 as the next period for a low in the real estate market. Coincidentally, to some, 1991 was the last time we had a bottom in the real estate market. If you add another 18 years to 1991 then you get 2009. My tendency has been to include the years 2008 and 2010 just to play it safe.
 
As a way to cross reference our perspective that the bottom is coming, I have included the Federal Reserve's data on real estate loans with the percentage change from the previous year. Although real estate loans by banks is a slightly lagging indicator it has tracked the performance of the real estate market in sync with the Wenzlick model.
 
If we haven't hit bottom yet it means that within the year 2010 we will have to go below the previous low prices of 2009. Such an occurrence would be a complete disaster for the financial markets. I am hopeful that the real estate market doesn't further devolve. However, the concern does rest in the back of my mind.
 
Barring any further crisis in real estate, I'm willing to go out on a limb and say that on the whole, as opposed to specific geographic regions, based on credible sources like Wenzlick, the bottom in real estate may be in.
 

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Posted in Federal Reserve Bank, real estate, Wenzlick