It is a simple question really. Is the rebound in home prices for real? Yet, I have not come across anyone using technical analysis to evaluate the housing market.
We have all heard the fundamental arguments of why or why not housing prices are bottoming. The analysis of interest rates (TLT - News), the shadow inventory, Fed stimulus, and future property tax rates (NYSEARCA:MBS) are all popular topics when considering where future home prices may be headed.
The verdict is still greatly up for debate as statistical games continue to confuse as this article from CNBC yesterday, 9/4, confirms. Traditional fundamental housing market analysis is not providing us with the answers needed as there are no real tangible conclusions.
Thinking Outside the Box
Why don't we try Technical Analysis to see what it is telling us about the housing market?
Technical Analysis can be used on anything with a price history and housing would certainly qualify; it may actually be a prime candidate.
If we are able to market cap weight the top 500 stocks in the S&P 500 and come up with a Composite Index to track 500 stocks (IVV - News) as well as apply analysis on it, then why not do something similar with housing?
The Case for the Case Shiller Index
The Case Shiller Index is built very similarly to the S&P 500 in that it value weights major metropolitan areas to come up with its 10 City Composite Index, like the S&P 500 does with the top 500 companies in America.
The supply and demand metrics of a home transaction are certainly similar to that of stock purchases in that there are buyers and sellers deciding on a fair price for an investment. Housing also is the largest part of net worth as over 60% of Americans own homes (more than the 54% that own stocks, according to Gallup). A case may even be made that an Index of Housing is more important and meaningful than one of the stock market.
Housing also has price levels where lots of buyers are interested and prices where lots of sellers are interested, demonstrating areas of support (demand) and resistance (supply). There are even times of euphoria (bubbles), changes in the amount of leverage used (like equity margin or futures), exotic financing options (like derivatives), transaction costs that must be taken into account (like trading fees), rental income (dividends), and many other comparable aspects. Sounds a lot like the stock market to me.
The Home Price Indices can be treated just like every other asset index, and I apply technical analysis to the Case Shiller Index below.
Six Technical Takeaways Labeled by Number on the Chart
1. Momentum is Picking Up and Shows a Positive Divergence
The monthly and yearly growth rates have bottomed and are starting to turn positive. This has formed a positive divergence with price as the momentum indicator did not make a new low in 2011, even though housing prices did. This is a bullish sign.
Source: ETF Profit Strategy Newsletter
2. Growth Rates Need to Sustain over 1% Monthly and 5% Yearly
The monthly growth rate has recently surpassed 1%, which is a positive sign. If the yearly rate can join it over 5%, that would be the first time both the monthly and yearly rates were returning to growth rates seen last decade. That would be a bullish sign.
3. S&P 500 Rebound puts Housing to Shame
If this is the recovery from housing, then it is disgraceful. When compared to the recovery in the S&P 500 (^GSPC - News) shown in blue on the chart, it is non-existent. That is bearish and not inspiring.
4. A Healthy Rebound would be back to Fibonacci levels
When markets rebound, typically they move back to their mathematical Fibonacci retracement range. This range for housing starts at 179, and the 50% retracement is at 188. The Housing Index is still only at 141 and nowhere near a typical rebound area. This is bearish and also not inspiring.
5. Support Zone all the way back to 1990's prices
Support and Resistance levels in Technical Analysis are where demand and supply are higher than at other price levels. This is usually a place where transactions are plentiful and a lot of parties have vested interests. The nearest such level of support for housing is back in the 1990s where price spent longer in the 70-83 range (8 years) than it did when price increased from 100 to 210 in the years 2000-2006. It is a rather scary data point, but must be considered and is bearish.
6. Cracks in the Foundation Formed Before the 2006 Top
The top in 2006 did not come without warning. Growth rates started heading down well before the peak in April 2006 and was at its lowest point in 5 years by the time the market peaked in April 2006. Homeowners should watch the rate of change again for any new hiccups in the recovery. Homebuilder stocks (ITB - News) also peaked in early 2006 and were down over 50% by mid-2006, giving another warning sign.
Overall the rebound in housing prices has been non-existent, especially when compared to the stock market (SPY - News). A healthy rebound in housing prices should be nearer the Fibonacci retracement levels by now instead of barely scooting sideways. There seems to be very little price support all through the 2000's and major support does not exist until all the way back to 1990s prices around 83.
There are signs of life recently, though. The positive divergence of the momentum indicator pointed to the recent rebound in prices. There is no reason to expect the monthly rates to not continue higher at this point. However, if monthly rates start to roll over again (similar to 2006's top), then housing's decline may continue farther, potentially all the way back to the 1990's prices.
The ETF Profit Strategy Newsletter identifies important support/resistance levels and combines them with common sense technical analysis to provide a short, mid, and long-term forecast along with actionable buy/sell recommendations across multiple asset classes. The ETF Profit Strategy Newsletter includes a Technical Forecast published a few times each week.
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