One Simple Chart to Gauge Real Estate Bubble Risk


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If you own a home, want to buy a home or live anywhere but under a rock, you’ve felt or heard about skyrocketing real estate prices.

Is there a real estate bubble, and what’s the risk of it bursting?

Here is one simply chart to gauge the real estate bubble risk … and incidentally, this short article also explains why the S&P 500 has been stuck around 4,200.

Ironically, COVID-19 accomplished what the Federal Reserve has tried for over a decade and failed: Inflation.

In May, more people than ever googled ‘inflation’ (orange graph, second chart). Often this kind of interest in a topic occurs towards the end of a trend.

For example, in the April 8, 2020 Profit Radar Report, I published google searches for ‘recession’ (chart below) to make the argument that the recession is over.

This contrarian take worked great for the recession, but does not work like that for inflation. Here’s why:

Most trends exhaust themselves when they become too popular (popular usually means there are no more buyers left, i.e. Bitcoin in April).

However, when inflation becomes too popular it can turn into a movement, a self-fulfilling prophecy, where consumers buy today because they think it will be more expensive tomorrow. That’s when inflation becomes a real problem (worse than supply shortages).

I don’t think we are there yet, but it must be carefully monitored (and I will provide specific inflation protection trades via the Profit Radar Report).

Anyway, the chart below provides a big picture look at the CPI, a popular but far from perfect inflation gauge.

I don’t want to be an alarmist here, but the CBOE equity put/call ratio closed at 0.36, the CBOE SKEW Index at 150.71, while the VIX is quite high and the actual daily range is only 0.21% (10-day SMA).

There are no precedents for this particular set of readings. If we relax the parameters, we get the signals shown below.

When there’s such a small sample size, I always ‘widen the net’ to ‘catch’ more precedents. Doing this revealed another common (at least in the past) outcome (discussed in last night’s Profit Radar Report).

From a charting point of view, the S&P 500 is trying to break above 4,250, which can be used as line in the sand to gauge risk vs reward.

Continued updates, out-of-the box analysis and forward performance based on historic precedents are available via the Continued updates and factual out-of-the box analysis are available via the Profit Radar Report

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

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World is Now Richer Than Ever Before

Thanks to the phantom economic recovery, mainly noticed by rising share prices in stock exchanges around the world, aggregate global wealth has risen to a new staggering high … but Draghi finds a fly in the ointment.

Based on Allianz’s Global Wealth Report, global shareholders are richer than ever before.

The Global Wealth Report tracks global funds held in stocks of every country – like the S&P 500 (NYSEArca: SPY), Dow Jones (NYSEArca: DIA), internationally developed markets (NYSEArca: EFA) and emerging markets (NYSEArca: EEM) – cash and cash equivalent bank deposits, stocks and consumer funds at insurance companies.

Assets like real estate (NYSEArca: IYR), cars, and art are not included in the report.

The wealth of investors around the world reached a total of $150 trillion.

You’d think that’s good news, but Mario Draghi – Europe’s central bank president – found a fly in the ointment. It has to do with banks. In fact, Draghi is alarmed.

Here’s the full story: Europe’s ECB Warden is Alarmed … For the Wrong Reason.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

Weekly ETF SPY: Lumber Prices and Lumber Related ETFs

At first glance you probably won’t be interested in lumber and lumber prices. But, you should know that lumber prices have a good track record of foretelling what’s next for the real estate market. According to lumber prices, the real estate market is in for a roller coaster ride.

Back in October 2012, March 2013, and May 2013 we used lumber prices as a leading indicator for real estate prices (article listed below):

How to Turn the S&P/Case-Shiller Home Price Index into a Forward-Looking Indicator

Leading Indicator Projects Still Higher Real Estate Prices

Is the Housing and Real Estate Recovery Here to Stay?

Using lumber as a forward-looking indicator for the real estate sector has proven quite accurate, so it makes sense to look at what lumber prices are up to now.

Earlier this year lumber futures soared to $411.50 for on-track mill delivery of 110,000 board feet of random length 8-foot to 20-foot 2×4 inch pieces.

March 14, 2013 marked a significant peak and prices have fallen as much as 32.8%.

As outlined by the above-mentioned articles, lumber prices precede real estate prices by 12 – 15 months. In other words, forwarding lumber prices by 12 – 15 months allows us to roughly gauge what’s next for real estate.

Based on this observation (click here for a side-by-side comparison of lumber and real estate prices), real estate prices have a rocky road ahead (see chart below).

What’s next for lumber prices?

The chart below shows that there was no bullish RSI divergence at the most recent low. This suggests that the current rally is a counter trend.

Resistance is provided by the red lines. Prices are already above the two lower lines so a deeper retracement of the recent decline is possible.

It appears that ultimately lower prices are ahead for lumber, which will eventually (with a 12 – 15 month lag) be bad news for real estate.

There are two lumber-related ETFs:

iShares S&P Global Timber & Forestry Index Fund (WOOD)
Guggenheim Timber Index ETF (CUT)

Neither CUT nor WOOD track the actual price of lumber, but follow indexes composed of timber companies or firms that are in the timber trade.

Is the Housing and Real Estate Recovery Here to Stay?

The S&P Case/Shiller Composite 20 Home Price Index just saw its sixth consecutive monthly increase (see chart below).

The index is a composite index of the home price index for 20 major metropolitan areas in the US. Many analysts look at the 6-month recovery (short red “tail”) and are ready to pronounce a permanent bottom for the housing and real estate market.

Obviously, this would be bullish for the iShares Dow Jones US Real Estate ETF (IYR), SPDR S&P Homebuilders ETF (XHB), and the overall real estate sector. But does this recovery have legs?

An Odd but Effective Indicator

It’s said that the end justifies the means and that may be the case with the quirky forecasting tool I’m about to introduce. This indicator has to do with lumber prices.

Lumber is a key component for every house and seems to play a role as a leading indicator. It seems that lumber prices tend to rise about a year before the housing sector.

The chart below plots lumber futures against the PHLX Housing Sector (HGX – not an ETF). HGX includes companies like Pulte Group, Standard Pacific, KB Home, DR Horton, Fidelity National Financial, Weyerhaeuser, etc.). I have set the lumber price forward 1 year to capture lumber’s leading indicator role.

The red arrows show the correlation between major highs and lows. Based on the tilt of the red arrows it might be even more appropriate to increase the lead from 12 to 15 months. Regardless, up until mid-2009 the correlation worked like a charm.

Enjoy it While you Can

Since mid-2009 the gyrations of lumber prices have been more pronounced and less correlated compared to the housing sector. I’m not sure why (massive monetary manipulation by the Fed likely plays a role). Assuming that the directional analogy will continue (or resume), lumber prices suggest that the housing recovery will last into mid-2013.

As of late, lumber prices have fallen through trend line support (black line), which is a bearish development. It will take time to determine just how bearish, but lumber futures suggest more weakness in mid-2013.

A resumption of the housing slump about a year from now would certainly harmonize well with our overall forecast for the stock market.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.