Real Estate: The Bull Market Is Officially Over
by Dr. Steve Sjuggerud
June 22, 2006

“When the supply of red dresses on the clothier’s rack builds up, then red dresses must be marked down to move them.  The same holds true for the housing industry…  Homebuilders will have no choice but to cut prices…”

-Dennis Gartman, in yesterday’s Gartman Letter

The bull market in real estate is finally over…

It’s going to get worse before it gets better.  And “getting better” could take years.  Let me explain…

First off, readers of my newsletter True Wealth have made exceptional profits in real estate in this decade.  I tell you this because, while most “experts” said real estate had to fall, I said the opposite was true…

Starting in 2001, I said real estate had to rise.  Readers pocketed up to triple-digit returns through REITs and homebuilding shares before we got out.

I cited a variety of factors back then - including the lack of new home supply - as a reason that housing prices had to go higher. More people wanted homes than there were homes available.

As of this week, times have changed…  The supply of new homes on the market hit a record 565,000 in April.  That’s nearly six months of “supply,” making this month’s supply figures the highest we’ve seen in ten years. 

While the supply of new homes has increased, buyer interest – according to builders - has dried up all of a sudden.  “Confidence among U.S. homebuilders dropped this month to the lowest in more than 11 years,” Bloomberg reported this week.

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At DailyWealth, we ran the numbers.  This chart shows what we found…

When you look at the far right in this chart, in blue, you can see homebuilder confidence falling off a cliff. This “confidence” is made up of three factors, including “sales of new homes expected in the next six months” and “traffic of prospective buyers.”

Builder confidence was lower only once in the last 20 years (as far back as we have data). When confidence fell down to current levels back in 1990, the price of a new home was about $200,000, adjusted for inflation.

The implications are bad. If you had bought back in 1990, once confidence dipped to current levels, it would have taken you over a decade to break even on that home, adjusted for inflation.

Builder confidence dipped briefly down to current levels back in 1995.  And from 1995 to 1998, new home prices didn’t do much. They started to move up as builder confidence moved up.

When builder confidence is high, prices tend to rise. And when it’s low, new home prices tend to go nowhere, at best. It’s all in the chart above.

With a record supply of new unsold homes, and confidence at low levels, we believe it's going to get worse in new home prices before it gets better. And while we can’t be certain, the tough times could last for years. 

Plan accordingly.

Good investing,

Steve