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Wednesday, 29 August 2007 |
Everything is Cyclical
Can there be advantages to all-time low housing market values? In the short-term, the obvious answer is no. However, in the long-run, the answer is quite opposite. In areas where there is much housing development, most likely no new house will sell at a highly profitable price - if the house even sells at all. In the economic situation we are at now, most houses won't sell. This is where the cycle begins its 360 degree rotation: Housing prices drop to fulfill the buyers needs (since they weren't selling in the first place, it becomes possible to do this), a massive influx of house buyers is recognized because of lower housing prices, and finally housing prices will begin to rise from the increase demand and limited supply.
Why do the house prices fall
There are a couple of reasons for why housing prices fall. Let's forward in time till we get to the state as mentioned in the above - housing prices begin to rise again. Well, now that buyers are beginning to meet the sellers' demand, housing prices will hit a high since this will lead to a limited supply. Once the limited supply is recognized, house developers will begin to build many houses, thinking that they will make a sure profit. Initially, this is the case. Later down the road though, the market becomes how it is now - the cycle continues. Now that the supply of houses and the temporarily inflated prices are too high, prices begin to drop so that houses can than sell.
In a way, this cycle is very healthy and all than more natural. If there were no cycle, a price for a house would be astronomical that only the wealthy would own one. The cycle keeps a strict restraint on the inflation of the housing market. This keeps houses at their real value in relation to the rest of the economy.
Where is the Market Heading?
So what makes real estate a hidden treasure? Let's refer back to the situation in the above. What happened when the housing prices were at a low? The cycle came into effect and prices began to rise as demand was beginning to rise over supply.
According to this chart of Real Estate Shares, the ROC is at a 3-year low. Not only is this the lowest low, but it is also far below the average duration that the ROC - or speed of momentum - remains negatively sloping. Above the chart, the Volume Oscillator is indicating a large increase in volume, as also indicated below the chart as well (red and black bars). This is very bullish, normally one buys when volume is rising and ROC or momentum are at a low. We think you can expect prices to return to where they were in its "pre-bubble" phase.
This is a chart of a homebuilder - KB Home. We see the same situation as the above occurring here.
Again, same situation as the above with Lennar, another homebuilder.
And last but not least, the same situation with a Lender corporation - Countrywide Financial.
We think the evidence is more than enough to suggest a bullish housing and real estate market, despite what the media says.
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