To hear the news media talk the death of the real
estate bull market is a foregone conclusion. There
is, after all, a near unanimity among news
publications of all stripes – including those that
are known as being permanently bullish on stocks and
real estate – that the real estate bubble is in the
process of deflating with no hope of a comeback in
the foreseeable future.
Everywhere one turns, it seems, one can’t help
hearing about the demise of the real estate bubble.
This topic of discussion has made quite a resurgence
in recent weeks as evidenced by the number of times
the term "housing slowdown" has been mentioned in
recent Internet blog posts or chat boards.
For instance, CNNMoney.com recently published an
article entitled "Deflating the real estate bubble."
It said, "Forget all those predictions about a soft
landing..." From there we’re told the real estate
deflation isn’t over yet and we could be in for a
long winter, so to speak.
As if that’s not enough we’re constantly
bombarded with the latest housing construction
statistics, the most recent of which showed that
construction spending plunged to its largest decline
in five years in July. This was "seen reflecting
housing weakness," according to one news wire
report. Also declining in the most recent reporting
period was builder confidence as, according to the
Commerce Department, "a record backlog of unsold
homes has forced many builders to offer an array of
incentives to reduce supplies."
The famous luxury homebuilder Toll Brothers added
fuel to the fears of a massive real estate decline
when it recently reported a sharp fall in its
quarterly profits. Toll said that Americans have
markedly reduced their purchases of luxury homes in
the past year. Toll reported a third quarter profit
decline of 19 percent which Toll’s CEO, Robert Toll,
blamed on an excess supply of houses and a "lack of
appetite by buyers who purchase homes as
investments."
"The continuing malaise in the housing
market...is the result of oversupply of inventory
and a decline in confidence," he said. "The
speculative buyers of 2004 and 2005 are now
sellers."
Forbes recently published an article asking the
question, "How low will real estate go?" ("The boom
is over, now the arguing is about how long lean
times will last.") Whenever any mainstream media
publication asks the question "how low will it go?"
in reference to any financial asset you can rest
assured the worst has most likely been seen. We’ll
talk about this a bit later in this commentary. But
first a glimpse at what the pundits had to say in
the Forbes article.
"The boom is definitely over, there’s no debate
about that," according to Mark Zandi of Moody’s
Economy.com. "Now the question is more how hard it
is going to land, if it lands at all." I would
respectfully beg to differ with Mr. Zandi as we’ll
see from the market’s number one leading indicator.
Suffice it to say there’s enough evidence from a
psychological as well as a cyclical standpoint to
allow for a real estate recovery in 2007.
Yet in spite of all this talk of the real estate
slowdown, it’s interesting to note that it hasn’t
yet been confirmed in the real estate equities (REITs).
The Dow Jones Real Estate Index (DJR) as of
Wednesday, Sept. 13, has even made a fresh new high
for the year at 288.69. Not only is this a high for
the year-to-date, it’s also an all-time high! So if
real estate is in such bad shape how come the single
most sensitive leading indicator/barometer for the
overall internal health of the U.S. real estate
market, namely the REITs, have held up so well until
now? Is this a rare case of the physical real estate
market peaking out and leading the real estate
equities downward? Or could it be that the real
estate slowdown is about to end and an in increase
in housing activity will begin anew in 2007?
For those of you who read my book "America’s
Housing Bubble" you know that this latter possible
explanation is the one I most favor. As I explained
in the book, this year’s 8-year cycle was expected
to bring down the general level of housing sales and
real estate activity on both a commercial and
residential level, which it has. But now that the
8-year cycle is bottoming I’m willing to venture
that by early next year we’ll see those real estate
statistics that look so bad right now take a turn
for the better. That seems to be the message of the
Dow Jones REIT Index (DJR).
As evidence that real estate equities haven’t yet
finished their bull market, I refer you to the
series of internal momentum indicators for the REITs
known as REITMO. These short- and intermediate-term
internal momentum indicators for the REITs (which
are based on the number of real estate stocks making
new highs versus new lows) were are all decisively
sending a positive momentum signal and suggest the
REITs have even higher to go in the months ahead.
Most importantly, the 60-day internal momentum
indicator for the REITs started surging upward in
the second half of August and has been going higher
each day ever since. One thing I’ve learned from
following the internal momentum indicators this year
is that even if all the other short-term indicators
are down, if the 30-day and/or the 60-day indicators
are still rising and making higher highs there’s
always an excellent chance that the sector in
question will go on to make higher highs as well.
This has certainly proven to be true for the REIT
sector as the 60-day momentum indicator is
positively soaring! Even the 5/10/20-day and 30-day
indicators have turned up since late August and have
made higher highs even as the real estate stocks
rally into an admittedly "overbought" position.
So with the bullish message screaming loud and
clear from the real estate equities, the latest talk
of a deflated real estate bubble seems premature
indeed. Here are a couple of areas to watch as
having further boom potential in the months ahead:
* Southeastern coastal real estate will
continue to boom . Each day nearly 2,000 people
migrate to the Southeast and to the Gulf Coastal
areas of the U.S. as the Baby Boomer generation
heads toward retirement and will flock to the East
Coast in droves to settle down.
* San Diego and Phoenix markets, among other
western regions, may still have a ways to go in
their respective slowdowns but watch for a comeback
in Washington, D.C., metro area real estate next
year.
Clif Droke is the editor of the daily Durban
Deep/XAU Report, a technical forecast and analysis
of several leading gold and silver stocks, including
DRDGold and the QQQQ available at
Desert Showcase
