The housing market doesn’t collapse overnight, crashes materialize over months rather than hours. This framework will allow you to identify and take positions in the market; benefiting from housing euphorias, booms and busts, months before the mainstream start reacting. You will be able to sell your assets before the inevitable market crash.
Step 1: Identify powerful leading indicators
Identifying the housing markets’ leading indicators is the key to predicting future price movements.
- The big three: building permits, housing starts, and new homes sales are the most reliable for predicting housing market health in the U.S
- Combining all the indicators on one chart gives an indication of what drives house prices up and down.
Step 2: Use the stock market as an indicator
Investors use global stock markets to express their view on the real estate and housing sectors.
- The S&P500 index is the main barometer of the economic health, composed of the top 500 U.S. blue-chip companies – some housing related
- It is a powerful indication of a potential housing bust or boom when the S-P500 starts trending along with the building permits indicator.
Step 6: Speculate without owning physical assets
REITs (real estate investment trusts) allow you to invest without owning anything physical
- They are traded on stock exchanges around the world and pay out some of the highest dividend payouts in the stock market
- You can also short them if you feel like the market is going to crash
Assessing the market’s liquidity
Interest rates and credit spreads play a considerable role in the availability of credit to build houses.
- House prices are 30% higher than when the last housing bubble burst in 2007, indicating that even more credit has been pumped into the system than ever before; when the next crash occurs the effects could cause a severe decline in house prices.
Last Word
Patience is critical in investing. You might have wait for over a year to see how the market pans out before you consider profiting solely from house price appreciation.
- You can also speculate by shorting housing-related stocks if building permits, housing starts, and new home sales continue to decline.
Step 4: Analyse housing-related commodity prices
Wood products are created at the manufacturing stage, so it takes time for the lack of demand to reach the manufacturer. If there is no demand for wood products, it’s a clear indication that there is a severe demand shock ahead for the market.
Step 5: Predicting the future housing market
Looking at the fundamentals, it’s pretty apparent there’s pain ahead for the housing market. Prices are starting to peak, and we are witnessing a slowdown in growth similar to December 05′.
- Yield Curve: Approaching Inversion: Negative Outlook.
- Homebuilder Stocks: Down 29.78% since Jan 2018
- REITs: Down ~20% or more
- Lumber Prices: Crash of over 40% in July 2018
