Tuesday, August 20, 2013

Real Estate Market - End of Recovery?

Yesterday House Builders Index was analyzed in terms of Elliott Wave count, to gain a better understanding of their future trajectory. Today, we will continue the housing analysis by analyzing the Real Estate index. Real Estate index is a very good barometer of the overall Real Estate market.

Real Estate market is a very broad category. It ranges from residential properties to commercial building, rental properties to investment complexes. Therefore, a decline in this index means that something is fundamentally wrong with the market. On the other hand, if this index keeps on rising, it means that underlying fundamentals behind Real Estate industry i.e. demand/supply metrics are nominal.

Like housing, real estate plays a pivotal role in the U.S. economic growth. If real estate and housing both are pointing back down, it will put significant pressure on the U.S. economy. This can be very bad for the overall economy, especially at a time when economy has not reached escape velocity and FED is considering tapering.

Following chart highlights the Real Estate index:

As evident from the above chart, real estate index went through a clear 5-wave decline (2006 to 2009). This decline suggested that the trend in the real estate market had turned from up to down. However, even in downtrends markets experience counter trend rallies. And that is what we have seen in the real estate market from 2009 to 2013.

This rally has taken on an overlapping shape, with market tracing out: A-B-C - X - A-B-C. Each A and C wave can be sub-divided into 5-sub waves. Due to this overlapping structure, and 3-wave market action, one can safely assume that rally in the real estate index from 2009 to 2013 was a corrective rally. Once this rally is complete, which it probably is, we will see a resumption in the downtrend.

When we evaluate Real Estate index rally in terms of Fibonacci levels, we realize that rally from 2009 to 2013 retraced 78.6% of the original decline from 2006 top. This is a classic wave-2 retracements. Such deep retracements not only bring back optimism, they also bring back new buyers into the market with the assumption that bottom is in place and we will go higher from here. Right at that time, wave-3 down starts which wipes out all the gains made during wave-2 and then some.

Therefore, based on the above Elliott Wave & Fibonacci analysis, it seems like the Real Estate market is close to a top. This observation is further supported by the Head and Shoulders formations appearing in the Housing and Real Estate indices. A top in Real Estate index might be the start of another recession in the U.S., and probably the world!

Note: Real Estate index topped on May 15, 2013. This was the same date when the Weekly IPM Model predicted a top!!! After few years, we might see back & realize that the recession started in the United States on May 15, 2013.

IPM Model UpdateIPM Model again predicted the market top on the exact date - August 5 (by the grace of God). Subscription

1 comment:

  1. Naqvi, Very intersting insight. With real estate potentially topping, the FED losing control of interest rates, and lets not forget the tappering (stopping the heroin drip to the markets), it seems that recession could very well be in the cards. I also agree with the CNBC article that emerging markets could get roiled. Lately, I scavenged up some cash and got into gold a few weeks back and bought a little bit of Apple in the mid $400s. I'm looking for stocks that pay decent dividends (4.5%+) but most seem to be under the 50 DMA, and I'm not into trying to catch a dropping knife, not at this point of seasonality, so I'm holding off. Be careful out there! Brad


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