Industry in Focus: The Housing Blues... Is it Really Over?

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Written by Mikey Macainag

Wednesday, 09 April 2008 08:11

Talks about a US recession and a bear market all started with the housing bubble late last year. After peaking in 2005, US housing flattened and eventually deflated in 2006. Foreclosure rates then increased and peaked in August 2007 as U.S. homeowners were unable to pay their mortgages. Not long thereafter, the crisis spilled over to the financial services sectors causing a myriad of other economic maladies that have not been seen for the past 3 decades.

At present, however, there are talks that the market is discounting bad news and is on its way up again. The new quarter started with a bang as it rallied by as much as 391 points boosting investor confidence. Analysts are starting to argue that the markets have already seen its lowest possible levels after Fed Chairman Ben Bernanke recently acknowledged the possibility of a recession. This acknowledgement makes the whole recession fear a thing of the past. The sudden change in sentiment of the financial markets from a bear to bullish mode is evident as the DOW, coming from a low of 11,650 posted last March 17, closed at 12,576 last April 8. This is a 900 point surge in less than a month.

So the ultimate question in everyone's mind is, is it the right time to buy or is it just a fool's rally?

We can probably answer this question by looking at the Housing sector, the sector that started the mess in the first place. The housing sector is represented by the Dow Jones Real Estate Index which is comprised of 41 real estate companies listed in the United States. Included in this Index are the likes of Toll Brothers, Inc (ticker: TOL), KB Home (ticker: KBH), Vornado Realty Trust (ticker: VNO), etc. As seen in the chart below, 2003 was the start of something big for the Real Estate Industry. Incidentally, this was also the start of the US bull market.

Dow Jones US Real Estate Index 8 Year Weekly Chart

As seen above, the index was steadily rising for five years. It is very evident that the primary trend line (long red line) is respected and is deemed to be healthy. The trend then accelerated further in 2006 (shorter red line) indicating a possible exhaustion rally as the volume during this time was not increasing. It is in 2007 that the Index started to decline as both the primary and secondary support lines (long and red red lines) were broken. It is also during those times that an expansion in volume also occurred giving evidence to massive selling.

The daily chart of the Index below will further illustrate how the index broke from its primary and secondary support lines causing the index to plummet from a high of 370 around Jan 2007 to a low of 220 at the start of 2008.

US Dow Jones Real Estate Index 1 Year Daily Chart

Since March 2008 however, this Index seems to be gaining momentum to the upside as evidenced by the expansion in volume happening. The first minor downtrend (dotted line A) was suddenly broken on March 18 after a 12 point one day rally. A second downtrend line (dotted line B) was drawn starting from the peak on October 5, 2007 up to the peak on March 25, 2008 to see how this current support level will be respected. If dotted line B is respected and another peak is recorded, then a third and final resistance line should be drawn. It is only when a third and final resistance line is drawn and broken; when we could say that a trend reversal (to the upside) is in the making. The MACD indicator, encircled in RED, is now above the zero line. This might be a strong signal that the momentum has shifted over to the bulls.

To summarize, it is still very early to tell if now is the right time to buy housing stocks or not. A third and final minor downtrend must be drawn and be broken before we can truly say that a reversal has happened. Buying as of this point may be unwise at it may just be another trap.

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