Housing Update

I've written many posts about the housing market and where we are based on my fundamental analysis. Many people have great interest because they've seen friends or family made fortunes during the boom time and hope that there are some treasures to be had once the market hit bottom. The biggest question is, has it?

I believe the most essential thing for investors to consider is value. Think about the property you are interested in and how much do you think price can fall... not rise. If the downside risk is less that upside risk, you buy. But how to determine the downside? I've compiled two data point that might shine some lights.

Coppock Indicator

Case-Shiller release housing data monthly. I have placed the data into a what's known as a Coppock Curve. This indicator allows us to extract the soul-called "risk" out and place a long-term buying indicator in. I first used the Coppock Curve in May 2009 to indicate a possible turn in the market. Looking back this has to be one of the greatest turn in history. The chart below shows a buy indicator came in May 2009 for San Francisco region

As a low-risk, long-term buying indicator, the Coppock Curve serve not to pick the bottom but indicate when it may be safe to buy. This is the first sign that home price may have reached a bottom.

Long-Term Cycle

Every market has a cycle and real estate is no exception. I came across Roy Wenzlick, a great real estate analyst. He developed a theory that real estate has a 18.3-year cycle. The most prominent thing about long-term cycle is that people tend to forget the past but focused on the future. Many of us have seen great wealth built on "new hopes" of housing for everyone with notions that housing will keep going up forever. Never have we stopped to think, if all of us own a house, who then will bid up the house we own and inflate the price further. You see, price is a function of supply and demand. When everyone own, there are no more demand. Thus the cycle of boom and bust is created. The chart below shows that the relative low was in 1973. If you add 18.3 years to 1973, you end up with 1991.3. Add another 18.3 years to that and you reach 2009.6 (July 2009).  Precisely where housing market appear to have reached bottom.

This is no magic. Wenzlick lived from 1894-1989 and yet his cycle analysis was able to provide us with some timelines.

Conclusion

I come back to the same thesis that housing isn't an investment or saving. You can't buy a house and get rich because it doesn't provide cash flow (unless it is an investment property). I also don't believe that housing will make a "V" bottom. The statistics and analysis provided above is an added evidence from an unconventional view that housing has bottomed. Whether it has or has not depend on the region and city but in aggregate, the high risk appears to be out of the picture. I too purchased a brand new home two months ago, not based on this analysis or data but purely on affordability. The government provided a $8,000 down-side risk while low interest rate provided a hedge against inflation. All the more reasons for you to consider owning a home.

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