What Traders Can Learn from the Real Estate Bubble

Over the past several months I have been paying close attention to the Real Estate market. Some of the activity is worth taking note of and applying that knowledge towards your trading portfolio.

What made me start analyzing Real Estate closely was that it had increased in price by around 28% over the past year. Homeowners yell “hooray” when they discover this. However, it presents some structural issues that are starting to make people wonder if the bubble is starting to pop. Over the past year the Real Estate Investment Trust sector was the #4 best performing asset class generating returns of 22.1%.

Like many investors, I visit Real Estate sites regularly to see how much inventory is available and what the prices are. Over the last 18 months it has been a wonder to behold. But the recent price increase worried me quite a bit simply because the magnitude of the move mixed in with the main factors that drive housing prices clearly say that this type of growth is not sustainable. Over the past 18 months we have seen the Federal Reserve increase the money supply by over $6 trillion. Historically, the real‑estate market benefits from this type of currency devaluation.

I am not pessimistic here. Quite the opposite, but I feel critical thinking is in order. Traditionally, Real Estate is the largest investment that anyone will ever make in their lives. While it is possible to make as little as a 3% to 5% down payment and borrow the rest in the form of a 30‑year mortgage, the initial problem is that when prices move 20%+ higher in a year, first‑time home buyers are incapable of saving fast enough or receiving enough salary increases to be able to qualify to purchase their first home. So, the first red flag is that the recent run‑up in real‐estate prices has bowed out the first‑time home buyer completely.

That means that the remaining activity in the real estate market takes place between commercial investors, home upsizers, and home downsizers.

Recently the Wall Street Journal wrote about this phenomenon highlighting the FOMO characteristics that have gripped homebuyers.

The article featured the following graph which should create a contrarian outlook for anyone who studies it. Homes coming on to the market have been selling in a week’s time, while historically the average has been 7 ½ weeks.

The average asking price is now the average selling price.
In a normal housing market, every property has to be sold at or above market value. That’s why the new price differential is a sign of changing supply and demand dynamics.

Next, we can start to analyze the real estate market by reviewing a few key indicators.

Take Zillow for example. Zillow ($Z) is down in price by 18% and the company’s future performance has shifted due to the decline in its valuation.

One stock does not make a market.

This price collapse is expected because real estate trends have fluctuated over the last quarter.

Last week Zillow announced that it will continue to have less risk, more rewards, and guaranteed peace of mind.

Evergrande owes money to multiple investors and the market is uncertain.

These Flipper companies are a new market trend and they are poised for big movement.

This is a chart that shows the company’s valuation.

In the backdrop of these events domestically, the next market has been identified as a trend.

Over the past decade, the bond rating has changed and caused the overall rating to decline.

In the year 2000, China had a substantial economic change that made markets more volatile.

It’s also the largest issuer of dollar junk bonds in Asia.

Evergrande owes money to banks and more than 200 customers with a strong market.

Clearly, the world economic ecosystem is a key factor in the analysis.

Real estate is a key sector that professional investors analyze and invest in.

In the early days of mining, one of the most dangerous is environmental.

We’ve been here before, but the risk of loss is still there.

During the 2008 Financial Crisis, the market has shifted and the future prospects remain uncertain.

How do you go about trying to make sense of it all…?

Embrace the solution that artificial intelligence presents for trading and investment.

In the marketplace, price is large but risk is also large.

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