Is the Real estate Market over-heated?
It has been a while since I discussed the Real Estate Market and investing.
Well, I feel as if I am back in 2007 when I was rushing around warning every contractor I knew, every person who was frantically trying to buy a house or a commercial building and all my REIT investors. I was rather frantic myself because the Real Estate Market went ballistic in a way that I had not seen before. Everyone was losing all common sense and the emotionally charged buying frenzy was out of control. No one wanted to listen to reason. Everyone was SURE that houses would keep going up and up and up in price.
Now, a decade later, which is early, the cycle is not quite as ballistic, but certainly here on the west coast the massive immigration of Chinese to the US has created a major bubble for this area of the country’s Real Estate market. Young adults especially and the lower income are racing to buy houses that are way over-priced. Talking with experts in the Real Estate field, most are saying this bubble is likely to burst in 2018, that is what everyone in the real estate market is bracing for now.
The trouble with this Real Estate Cycle is it is not over the entire US. It is region-specific. However, it IS fueled by the identical problem of 2007: The Feds flushed too much money into banks during the Stock Market collapse of 2000-2002 and continued to keep interest rates too low. Stocks were not in favor so the money went to Real Estate. This time the money is going into Bonds as well as mortgages in anticipation of rising interest rates which will trigger Interest Rate Swap redemptions at some point.
I have several students who are interested in buying Real Estate at this time. Yes, there are some regions of the US where the Real Estate boom has not reached its Peak yet, but these regions are likely to catch up by 2018 so the long term prospects are limited unless you like a lot of risk and are willing to exit near the high of that peak.
To study ANY industry Cycle, you must depend upon charts. It is the fastest and most reliable way to determine the Sector cycle and industry cycle.
Real Estate is classified as a Cyclical Sector Industry. The Cyclical Sector includes: banking industry, Real Estate Industry, Steel industry, Textile Industry, Advertising industry, Agricultural Industry, Apparel industry, Aluminum, Asset Management, Auto Parts, Capital Markets, Coal, Copper, Credit Services, Gold, Silver, Home furnishings, industrial metals and minerals, all insurances, leisure, lodging, lumber and wood products, paper products industry.
The sector is too diverse, so studying the sector chart will not help. Focusing on the individual charts of the Real Estate instruments traded on the Stock Exchanges is helpful.
All the Charts are Weekly.
Real Estate General has been tightening its value action and continues to move up with a steeper angle of ascent. This is almost a runaway trendline pattern and indicates buying patterns common when the retail crowd becomes overexuberant about an investment. Without corrections along the way, this is a higher-risk entry for a long term investment. It is at a new all-time high, nearly double from the 2007 previous high. This bubble started in early 2015. There are a couple of new IPOs that may do well but more REITs that are illiquid with unstable long term trends.
Real Estate Services did not have the early gains of the general industry for REITs but has shown rapid increases this year with some corrections on the short term. At a new all-time high, this is a very high-risk pattern due to the extreme angle of ascent for the REIT industry for a long term investment.
REIT Diversified is in a trading range that is now a couple of years along. It has once again turned at the highs of the range (trading ranges do not have consistent highs and lows in the range) and so the trading range will continue. This area of the Real Estate market is lagging far behind others.
REIT Healthcare Facilities: this is a highly volatile chart pattern with extreme peaks even on a monthly chart. This industry looks like a biotech rather than an REIT. It is a LONG TERM trading range and that makes it very difficult for a long term investment. Sure, there may be one or two individual REITs within this industry that may work for a long term hold. But overall this REIT industry is not ideal for long term at this time.
REIT for Hotels and Motels which is part of the Real Estate Commercial Properties. Commercial properties are not under one umbrella REIT, they are divided into sub industry types.
This REIT chart is another trading range which should, IF the industry expands globally over the next couple of years, break up. IF there is any global conflict with trade, if free trade among nations is thwarted, if there is a trade war anywhere on the planet, then this trading range could do the opposite of most and break to the downside. The reason it is in this trading range is all the current conflict with trade agreements around the world. This is not an ideal long term investment area either unless you like to sit around waiting for some sort of ROI. Again, maybe one or two of the group might develop a trend that is worth investing in but watch where the main hotels are located in the world. There are several hospitality healthcare REITS within this group and it drags the entire industry down.
REIT – Industrial had been expected to do better than it has. It is stalled also due to trade conflicts among nations. This is also a trading range that is forming higher lows but no higher highs that sustain. It could be stuck here until the global sentiment regarding corporations building industrial buildings around the world improves. For now most major corporations have put their construction plans on hold everywhere, even in the US. This is a type of Commercial Property. Repeat: one or a few REITs may outperform among this group which could provide a few years of long term investment growth. Most are either topping or in trading range patterns.
REIT office also shows the troubles of the commercial property development in the US and elsewhere. Corporations are reluctant to start new corporate office construction and the industry is stalled. The bulk of these REIT charts show topping formations or trading range patterns.
REIT Residential shows the growth that has occurred in the past year and a half in certain areas of the US including the west coast bubble. There are a few bottoming REITs in this sector that may offer a longer term hold opportunity.
ARR: This is one REIT Residential that is bottoming on a long term scale. Unfortunately the completion of the bottom long term has failed and it is turning to retest lower support levels.
Both Industry Charts and individual REIT charts are showing that this Real Estate Cycle is well into its final years. It is not just beginning as many investors are being told. This doesn’t mean this is the immediate end of the Real Estate boom. PLEASE read my writing with care. All too often some of you are misinterpreting what I am saying.
Real Estate is a higher-risk long term investment at this time because the cycle has been developing some several years now and many of the REITs individually are topping, showing a risk of a top, in trading ranges, or turning down. A few are still going up but NOT the bulk of the REITs. The majority are showing signs of rotation or distribution.
When rotation is underway, the industry will work very hard to entice new investors to buy. They will go overboard promoting the REITs as a great investment, encouraging less informed buyers to invest and as they do, of COURSE prices will move up for a while. But ultimately you have to consider the risk versus the actual viable ROI IF you intend to hold for the long term, meaning 1-10 years. This is not an ideal time to invest for the bulk of the REITs, for individual homes in the “hot residential markets” of the US, mostly the west and east coast areas, nor is it a great time to invest in commercial properties because the majority of corporations are NOT investing in construction projects. Oh sure, Ford announced a building of a plant in the US but that was an OLDER already determined project.
For now, major corporations are being very conservative waiting to see how the trade disagreements are settled out. That is why this is mostly a TRADING RANGE REIT condition market. A while ago I mentioned that there was maybe a year or two left and that appears to be correct.
REPEAT: I am NOT saying that REITS won’t go up or that housing in the US won’t keep rising in price. I am stating that, at this point in time, the risk factors outweigh the potential gains. If you ignore risk because a stock or an REIT or any investment sometimes continues moving up then at some point you WILL take a big loss on your long term.
You have to consider the risk and always choose the lower risk over the higher risk. Otherwise you are just gambling.
In addition, you want exponential growth not slow sluggish growth for long term.
Fund Managers will proclaim success even with minimal growth. But you can do far better than any funds manager because you have no restrictions on choices and decisions. They have tons of restrictions and only try for a minimal ROI.
Invest with Knowledge,
Martha Stokes CMT
Chartered Market Technician