Case-Shiller Index Vs. Housing Market Index: Has Real Estate Bottomed Out?

Includes: IYR, URE
by: Katchum

We recently saw bullish indicators for housing demand. At the same time we saw bearish indicators for housing prices. Let's take a deeper look at the overall trend in real estate (IYR, URE).

The Housing Market Index (HMI) published by Wells Fargo (here) is indicating that demand for new homes is improving. The HMI is an index of over 300 home builders, which shows the demand for new homes. The index runs from 0-100, so a rating of 50 would mean that demand for new homes was average. Chart 1 gives the HMI from 1985 onwards. The chart is showing a trend that is bottoming out since 2009 onwards. The HMI rose to the highest level since 2007. Still, demand for new homes is below average.


Chart 1: Housing Market Index

The Case-Shiller Index monitors the constant-quality house price indices for the United States and is shown in chart 2. Home prices have hit an all time low since the economic crisis hit in 2008. The index was down 2.6% in March 2012.

Chart 2: Case-Shiller Index

If we compare both charts we can find a certain correlation between the two indices. We got a peak in both charts in 2006. However, there is a delay in the charts. The Housing Market Index fell first in 2005-2006, indicating demand was going down for new houses. Afterwards, the Case-Shiller Index fell in 2007. So basically, demand goes down first, after which housing prices fall with a delay of one to two years. The same can be said during the year 1990. First, the Housing Market Index started to fall in 1988-1989, after which the Case-Shiller Index fell in 1991.

So if we have to predict the future based on these two charts, do we have a bullish or bearish scenario going forward? Theoretically, the Housing Market Index is the primary indicator. This index is going up right now, so demand is going up for new homes. After which the prices (Case-Shiller Index) will go up with a delay of 1 year. So I'm pretty bullish on real estate right now and this is consistent with the view of Marc Faber who told us a few months ago that U.S. real estate has value right now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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