Due to the devastating losses, countless investors have been fearful of getting back into real estate. This created new opportunities for savvy investors but also heightened risk for uninformed investors who still hang on to the false belief that real estate prices only go up over the long term.
A popular and underused leading indicator for the real estate market is the Housing Starts Index, which measures the number of new homes that developers are building. This number tends to precede future sales volume and housing prices.
Developers follow real estate trends and try to only build when the market is becoming stronger. Because of the long lead times, they often build the most at a top. They are often the victims of the same bad emotions as other investors that become the most enthusiastic at market tops. If developers can get the financing, they will build.
As you can see in the chart below, developers are currently beginning to produce fewer homes. Many analysts think that the developers know something we don’t, and therefore are looking for another real estate recession. However, my work shows that just like corporate CEOs who make a big acquisitions right at market tops, the developers make the same mistakes. In other words, when they’re cautious, it is bullish for the housing market.
If my observations still hold, it would be a bullish argument that could lead to excellent investment gains for smart real estate investors, at least over the intermediate term.
Who was left behind in this big stock market rally since 2009? The homebuilders, which, despite large growth in earnings, have basically not moved from their recession lows. In fact, these businesses STILL appear to have greater room to the upside, even with one of the highest valued stock market indices in history.
Looking at the price of these stocks compared to the earnings they produce, we can see that this industry has the third (out of 95) cheapest valuation of the market, and a five-year expected earnings growth much better than the general market. Could homebuilders be the next hot sector, as the charts are indicating?
Real estate prices along with demand for new homes have had little movement for most of the post-recession era. However, over the last few years, and particularly the past year, prices have begun to see the same large acceleration they had encountered during the 2002-2007 bull market.
With the complexities of the financial markets today, advanced technical and market analysis is necessary to avoid missing the huge opportunities that Wall Street tends to miss. These clues are what can make or break an investor’s portfolio.