Will Tax Bill Produce A Real Estate Debacle Or Is A Boom Ahead?

I have seen some clues within the real estate market that are somewhat reminiscent of the environment leading up to the Great Financial Crisis of 2008. However, there was a roughly two year lead time between the first signals of excesses and the crash of 2008.

Between 2008- 2009, many investors were burned, with the estimated losses equaling more than 20 trillion U.S dollars.

Due to the devastating losses, countless investors have been fearful of getting back into real estate. This created new opportunities for savvy investors but also heightened risk for uninformed investors who still hang on to the false belief that real estate prices only go up over the long term.

A popular and underused leading indicator for the real estate market is the Housing Starts Index, which measures the number of new homes that developers are building. This number tends to precede future sales volume and housing prices.

Developers follow real estate trends and try to only build when the market is becoming stronger. Because of the long lead times, they often build the most at a top. They are often the victims of the same bad emotions as other investors that become the most enthusiastic at market tops. If developers can get the financing, they will build.

As you can see in the chart below, developers are currently beginning to produce fewer homes. Many analysts think that the developers know something we don’t, and therefore are looking for another real estate recession. However, my work shows that just like corporate CEOs who make a big acquisitions right at market tops, the developers make the same mistakes. In other words, when they’re cautious, it is bullish for the housing market. Read More…

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