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Clif Droke

Clif Droke

Clif Droke is the editor of the two times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock…

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Can the Real Estate Boom Continue?

A reader responds: "Clif, I really enjoy reading your articles about the economy! What do you see for the real estate market in the next 6 to 12 months? Should one invest in real estate or wait?"

I'm not a real estate advisor and therefore cannot formally recommend investing in real estate or waiting. What I can share with you from my area of expertise of technical analysis, however, is where I see real estate and real estate equities heading in the foreseeable future.

Earlier this year a rash of newsletter and Internet commentaries came out warning of an "imminent" real estate market crash. I was one of the few who said the exact opposite, that the housing market and the REITs would continue along their up-curves this summer. The pundits were also very bearish on the mortgage and lending stocks, including Fannie Mae, Freddie Mac, and LEND. In my June 7 commentary entitled "Is Real Estate as Bad as Everyone Says?" I stated that LEND would encounter support in June and then turn up into summer. Concerning FNM and FRE I wrote, "I see FNM and FRE in particular doing well in the near-term. Both stocks are trying to confirm a bottom after the recent decline and recovery rallies in both stocks should be evident in coming weeks." Below is a chart showing the predicted recovery rallies in both stocks. Mission accomplished!

I wrote in my June 7 commentary on the real estate market that "the message of the monthly chart in the prime U.S. REIT index (Morgan Stanley REIT index, symbol RMS) is bullish," adding that "The RMS has closed well above its 10-month moving average for the month of May and the 20/30-month MAs are still up and rising at a good rate of change. These directional drivers are about to catch up with the price line in RMS, which should result in an upward thrust in REIT values in coming weeks/months. Also, as you can see from the RMS monthly chart above, the stochastics indicator has reached a deeply oversold reading, which means the REITs are likely about to turn up in a big way this summer." My conclusion in the June 7 article was: "Could the REITs be one of the big turnaround plays of the summer of 2004? I think so." Once again, mission accomplished.

What about the outlook for the real estate equities in the remaining months of 2004 and heading into 2005? I did a waveform analysis on the weekly chart of the Morgan Stanley REIT Index (RMS) and came up with a similar conclusion for the intermediate-term as the one I shared with you in the June commentary concerning the short-term, namely, bullish. RMS had a good day last week, advancing to close at 652. This level represents a 4-month high and we're now within reach of the pivotal 660 level (previous top). My upside expectations for RMS, intermediate-term, is for at least the 680 level to be reached before the next major top, maybe higher.

Below is the RMS daily chart with 30-week and 60-week moving averages. I've long argued that both these averages are the intermediate-term keys to deciphering the dominant trend in this index (see June 7 commentary). As expected, RMS continues to trend higher along its rising 30/60-week MAs.

From a psychological/contrarian standpoint, I've noted quite a few bearish articles in the mainstream and financial press of late. These articles appear aimed at engendering a bearish attitude among the public, and this is obviously bullish from a contrarian standpoint. One headline in a major daily newspaper read, "Real estate on shaky ground?" Another major news wire story emphasized that lots of homes are coming up for sale right now and suggested that supply is about to outstrip demand in the housing market. The press is advertising a bearish real estate market and this can only mean one thing -- the bull market in real estate is poised to continue.

I might also add that Hurricane Charley will most likely be a boon to coastal real estate markets. That's right, major hurricanes are usually followed by renewed bull markets in coastal property values and home building once the clean-up and recovery periods have ended.

The following extract is from a newspaper story from USA Today on the new housing boom along the Eastern and Gulf shores of the U.S. It represents an extremely important demographic trend, fundamentally, that will likely continue to propel the rise in U.S. home values and the overall real estate bull market. The headline: "Growth Reshapes Coast: A Wave of Development Overwhelms the Shore." It reads in part:

" Boom on the beach: 1 in 7 Americans live along the East and Gulf coasts. A new American migration, one that rivals the exodus from East from the Frost Belt to the Sunbelt a generation ago, is transforming the Atlantic and Gulf Coasts....To a large extent, this migration is being fed by the booming metropolitan centers along the East and Gulf Coasts. This shoreline strip is growing significantly faster than the rest of the country in population, employment, and gross domestic product (GDP). In many cases these counties have the fastest-growing economies in their states."

Says a Rutgers professor interviewed by USA Today, "There's no stopping the trend. It's like the primordial urge of sea turtles (to lay their eggs in the exact same spot), the instinct to live near the water is that strong."

The article goes on to state that demographically, middle-class baby boomers (people ages 37 to 56) are driving the demand for second homes. More importantly, the article emphasizes the new trend towards homes as investments. Writes USA Today, "Major stock market indexes declined in each of the past two years. Meanwhile, home prices in almost every market have been climbing strongly upward. The longer these trends continue, the more likely it seems that people will choose to invest in real estate rather than stocks."

The real estate boom is now inextricably linked to America's economic stability. A rising real estate market are now part and parcel with a stable economy and rising financial markets. Simply stated, the Fed will not allow the real estate market to collapse at this point in time. As I've stated many times in the past, until the global economy is fully integrated the U.S. -- the world's chief economic engine -- will NOT be allowed to slip into serious recession, will NOT be allowed to see its stock market crash, and will NOT see its housing market demolished. We are still a few years away from this goal of world economic/political unity, therefore the real estate boom continues apace.

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