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Proprty Investing Technical Analysis

Fri, 08 Jun 2012 15:18:04 GMT

Can we use the skills of a technical investment analyst in order to predict where we might find real estate investment opportunties? In this short article we look to utilise the skills of a technical stock analyst by analysing housing market statistics to try and successfully predict future movements in house prices.

Technical Analysis for Property Investments

There are two types of stock investor, the technical investor and the fundamentals investor. Technical investors will seek to identify trends in the pricing of a stock, and attempt to profit from predicting the rise and fall in value. Fundamental investors will seek out companies with strong prospects, a strong balance sheet, unique product, sound management and good prospects, they may also try to identify poor companies where they think the stock is overpriced and the company will underperform and the stock price will fall, betting against the stock or shorting.

Those who instead place thier faith in property investments however, tend to be purely fundamental investors, buying - or betting on - specific properties based on a host of factors including location, value, rental yield, and the physical condition of the property. But can we in fact benefit from some data analysis too, just like a technical investor, in order to try to identify potential areas of opportunity in a property market by identifying trends in historical data.

Let’s look at one of the most widely touted property investment hotspots – the United States of America – and see whether we can predict future price movements by looking for trends in underlying fundamental statistics such as housing demand, and then compare with trends in house prices in order to explore their relationship and see how changes in one dataset are reflected in the other.

The first piece of information we will look at is demand for new homes, and the best measure of this is the Housing Market Index (HMI), published by Wells Fargo. The HMI is an index of over 300 home builders which shows the demand for new homes. According to the HMI, demand for homes hit rock bottom in 2009, and is now rising, approaching the level it was at in 2007, but still well below average.

So let’s see what effect the severe lack of demand had on house prices by looking at Case-Shiller Index, the most widely quoted measure of US house prices. This index tells us that house prices bottomed out in March this year, approximately 3 years after demand fell off a cliff.

Comparing both of these charts, we see that in 2005 and 2006, the HMI (demand) fell considerably, then two years later in 2007 house prices started to fall. This tells us that when demand drops off, house prices follow about 2 years later. Looking further back to the eighties, demand started to fall between 1988 and 1989, and house prices started to fall two years later in 1991.

So what conclusions can we draw form this data that might offer us an insight into where we might choose to invest? If we apply the same logic to the current position of the HMI and the Case Shiller Index, we must first look at the HMI, which is currently on the up. So that means that, should our theory prove to be correct, we should expect to see house prices start to rise in 2013 or 2014.

Whilst in my opinion, every individual deal should be considered on its own fundamental merits, I also think it would be unwise not to explore the potential of technical analysis in property investing, if only as a guide to where one might first start researching and seeking lout potential opportunities.

DGC Asset Management provides Investors and Financial Advisors with access to market leading Asset Class Analysis Reports and opportunities to invest in value added real estate capable of delivering yields in excess of 15 per cent per annum, ideal for those seeking income investments outside of traditional markets.

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