Your Early Warning Sign for the Next Real Estate Peak

It’s very easy to get caught up in all the day-to-day noise. The S&P 500 was up a hundred points, the Dow Jones down six hundred points, and on it goes.

The stock market will show volatility from time to time.

Right now is one of those times.

In all of this, keep in mind the overall trend.

Markets had a big run up from the low in February 2016, nearly without a down move. They were due a retracement.

Markets could fall lower from here and still bring in a higher low on the monthly chart.

Then you just watch and see if that monthly low holds. That’s all you need to know.

It’s hard to get to bearish when homebuilders like Lennar Corp [NYSE:LEN] are posting strong results. They reported first-quarter earnings last week. New home orders rose 30% and the strong result surpassed analysts’ expectations.

Homebuilder teams up with tech startup

Housing starts are a good way to gauge how the global economy is tracking.

Buying a house is the biggest purchase a consumer will ever make, and it indicates consumer confidence and a strong job market.

The company is not standing still. Bloomberg reports that the homebuilder has been collaborating with a tech startup known as Opendoor, to make it easier for their customers to offload their houses and trade up to new ones.

The principle is similar to trading in an old car to buy a new one. It’s something that hasn’t really existed before for homes, and Lennar reports their customers love it.

Opendoor simplifies home transactions and can put together an offer within 48 hours. If the homeowner accepts, Opendoor then buys the home, makes repairs and puts the property quickly back on the market.

Lennar customers using the service don’t have to worry about selling their home, they already have a ready buyer. And they don’t have to carry two mortgages while waiting for their old house to sell.

Let’s bring up the monthly chart:

Lennar Corp NYSE Monthly Chart. 10-04-2018

Source: Optuma
[Click to enlarge]

Note how the share price hasn’t really made a lower low on the monthly chart since the low in 2008. The trend is up. That’s all you need to know. And whilst homebuilders like Lennar are making higher bottoms you can’t get too bearish on the economy.

Note how after 2012 the share price really took off. That’s because in the years after the financial crisis a lot of home builders were decimated, and homes that would eventually be needed, were never built. It’s been catch up ever since.

When you see a chart like this you really are seeing the economic cycle unfold right before your eyes. I could say plenty about the recent share price action, but that’s not what I want to cover today.

It’s the left side of the chart I want to zero down on. Let’s bring it up, the run up to the top, from the prior real estate cycle. Check it out…

Lennar Corp NYSE Monthly Chart. 10-04-2018s

Source: Optuma
[Click to enlarge]

First thing that’s interesting is how this stock was climbing higher 2000 to 2003. That’s really bullish, because all the while, the major US indices were going lower in that period, after the dotcom bust in 2000.

That was always forecasting higher prices to come.

Note how the stock topped out July 2005, that’s more than two years prior to all the major benchmarks which topped out in October 2007.

It then breaks monthly lows in May 2006 and a second really bearish break of monthly lows in June 2007.

During the same period, all the major benchmark indices were still going higher!

If that’s not a leading indicator I don’t know what is.

How the real estate cycle can be your trading advantage

You see the GFC was not a financial crisis, it was first and foremost a land crisis. It’s real estate which drives the economic cycle.

It’s in the land market where the stresses will turn up first. The chart of Lennar clearly shows this.

Lennar is the major homebuilder in the US. It’s a company you could follow to see how the real estate cycle is tracking.

We’re still in the first half of the real estate cycle and homebuilders are still playing catch up, because of the millions of homes that were never built in the years following 2008.

The chart suggests this company may have a big second half to the real estate cycle, it’s maybe one to watch in the months and years ahead.

No one rings a bell at the top, but come 2025 or so, you could be watching this stock to signal a major market turn.

At the time you might read some prominent person saying the economy has never been in better shape and the business cycle has been confined to the dustbin of history.

All the major indices might still be breaking higher into all-time highs, but if you’re seeing housing stocks like Lennar breaking monthly lows, well you know what might be coming next.

It’s all to do with the land market. Knowing that, and the sequence and timing of the real estate cycle, is your trading advantage.

If you want that advantage, then go here.

Terence Duffy,

Lead researcher,
Cycles, Trends and Forecasts

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come — which he details in Cycles, Trends and Forecasts.

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