Using Technical Analysis to time Real Estate Market?

Question

Was just throwing ideas around in my head and was wondering has anyone ever used or thought about using technical analysis to time the real estate market? Could you tweak something like MACD or the myriad of other metrices to time the real estate market? Is this something that would even work in the real estate market considering the non liquidity of the market? Example could you take data from census like housing starts and building permits, existing home sales, sales tax movements, housing market index, ect. and map it out like stock charts do, then use something similar to technical analysis as a predictor? Anyone use portfolio theory or value at risk? This is all just theory, but was curious what others think, and please don't hesitate to say it's a dumb idea, I'm really curious to see the consensus.

Thanks

Brent Seehusen · Answer

In the California market, Bruce Norris is considered an expert on this.  The leading indicator that he found to be most predictive was housing affordability (i.e. the percent of median income earners that can afford the median priced home).  Once this number dips to 17% for the state as a whole, it's time to sell.   California is very boom/bust so his technique has proven itself over the course of 3 real estate cycles now.

Another author named Robert Campbell wrote a book called Timing the Real Estate Market that you might find useful.  He narrowed his buy/sell indicator down to a blend of 5 data points:  existing home sales, builder permits, defaults, foreclosures, and interest rates.  He also focuses exclusively on the California market, but I would think the same concepts would transfer well to other areas.

There's also a book called Timing the Real Estate Market: How to Buy Low and Sell High in Real Estate by Craig Hall that I have not read, but might be worth checking out.

Clinton Holmes · Answer

I'm curious to know, what were some of the indicators that you discovered and what did you find they were correlated with?

Chris Holmes · Answer

How can you attach technical analysis to the RE market. Don't waste your time on such stuff. The vast majority of folks here wouldn't have a clue what you're talking about anyway

TA is not an exact science. It works but only with stocks. Stick to what it's intended for.

Louis Leone · Answer

Account Closed

I'm looking at coming up with a model for this right now.  I've been looking at different indicators, both macro and micro for housing markets to see what works best.  Some indicators definitely have higher correlations than others, but the key is to be able to catch the market at right part of the cycle.  Some markets are easier to determine what part of the cycle they are in, but others are a bit more challenging.

Usually, you're on to something if you can find markets that look promising but aren't in the lime light yet (e.g. they aren't known by everyone).

Bill Gulley · Answer

I'll go with Chris on this one.

Attempting to use theories developed for a "chartist" in stocks or bond markets isn't applicable to real estate, the markets are vastly different. Stocks trade in nano seconds, real estate on a macro level moves monthly.

Next issue, state or national market trends at a macro level are fine if you have large holdings, geographically dispersed, homogeneity (like assets). A developer will certainly look  at economic aspects before bringing a new shopping mall in an area, or a region.

Investors first need to understand that real estate at their level of investing on a micro basis can have very little to do with national or regional markets.

Unlike stocks, where market investors may be world wide, having unlimited supply of similar alternatives with high liquidity, real estate is just the opposite.

Physical aspects-immobility, indestructibility and nonhomogeneity, the location can not be moved, land can't be totally destroyed and no two parcels are exactly the same. Economic aspects are scarcity, modification or improvements, permanence of investment or fixity and area preference or "situs" which may include intrinsic values or satisfies other needs.

Real estate is unique, drop back to your Economics 101 class, "factors of production" in economics are land, labor, capital and entrepreneurship. land is the only factor that can not be replaced as a factor or requirement to produce goods or services, all other factors may be substituted, if you have less capital, more labor may be used to obtain the desired outcome.

This aspects, physical, economic and economic principles require a different approach in the analysis of land and improvements.

You will have local trends, new starts, employment, gentrification, social influences, public amenities as well as commercial activities. These are not necessarily influenced or driven by national or regional market changes. During 2007 to 2010 and to date, the southeast side of Springfield, Mo. has grown, the south center are grew commercially. They never stopped building apartments. Center city revitalization continued, it slowed but still continued. Now, compare that to the effects of the bubble popping nationally.

If investors had relied on national trends in seeking opportunities they would have missed the boat.

That's why we say "All real estate is local"!

As to ratio analysis, some approaches to an asset portfolio may apply, such as the quick asset test or maturity distribution, but they are not adaptable to real estate as they were designed to measure performance of a liquid asset, real estate is not, the approach to asset management is different in maintaining and improving and revitalization of long term assets.

You can look to other markets as to an investor's opportunity costs, alternative investments, but risk can be a difficult aspect to factor in comparing stock to real estate, or long term market factors to volatile stock prices and slow rates of appreciation. It's apples and oranges.

But, number cruncher's will always try to compare things attempting to develop the fool proof method, some even write books about it. Good luck :)

Clinton Holmes · Answer

@Brent Seehusen

Thanks for the book recos. I will definitely be checking those out.

-Clinton

Kevin Porter · Answer

I was thinking about this over the last few days.  It is something that I want to learn more about, and possibly develop some model.  If you come up with some ideas, I'd love to hear it.

Joel Owens · Answer

There are plenty of books on market cycles and data to analyze. You FIRST need to define what type of asset are you looking at for the market cycle you want to invest in??

For example retail is on a different cycle than multifamily which is on a different cycle than residential etc.

Some investors will stay in an asset class and not deviate they just buy more when the market is down and hold more when it is up or sell.

Other investors are constantly looking for the next asset class that is at the bottom of the cycle.

So to give an example when Coke stock is low both investors might buy a lot of the shares. When the shares go up and get expensive one investor will sell for the gain and look for the next stock that is undervalued to do it again.

The other investor will simply hold their gains for the long term and then still buy some and wait for it to go down again to purchase in more bug chunks.

One way isn't right or wrong just different investing styles. Data is subjective in that you can interpret it a number of different ways.

I could look at data and say this is awesome because of Y and someone else says it is not good for them because of X.

Using Technical Analysis to time Real Estate Market?

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