Blog Title: New Format Manager (Lee MacFarlane) Musings & Getting to know your Real Estate...
We are changing the format for our blog. This is now going to by my place to muse about what is coming across my desk in regards to technical analysis. This might include commodities, the stock markets, currencies, the economy, or whatever suits my whim at the time. Right now real estate has been in my pervue.
My family just made the investment to buy our first home. Being an entrepreneur, I previously stashed much of my 'wealth' in business, not real estate. We also had very reasonable rent. Well that all changed now. It's funny when you are invested in something how much more interested you become in the gyrations of that particular sector....
I think I may have a unique perspective. Yes, I am a self-made technical analyst (currently studying for my chartered designation - CMT), but I also own a construction company and I was the President of the local home builders association. One reason why we created computer driven trading systems at Kinship Investments was to take the emotion out of decisions and expectations. I hope with my experience in the real estate field coupled with my analytical perspective I can keep my opinion subjective even though I am now a 'locked-in investor' :-)
One thing which is very important when it comes to studying any market is data. If you only have a small amount of data, then it could alter your view. My rule of thumb is to take your average holding period and times it by 30-40 data points. This will give you a general reflection as to how much information you 'should' have to make a well reasoned analysis of the market you are studying. For example, if you use a 60 minute chart such as the one below that has an average trade time of 1.5 days then that works out to about 1500 bars. The picture below only shows about 400 bars. So you may look at this chart and say, "OK, it's in an uptrend, it possibly has an ascending triangle, RSI has come off lows, and the price recently completed a support line, so there is the potential for a long trade depending if it breaks up or it could be a short sale if it breaks down".
60Minute chart with only 400 bars showing.
Now stretch out your view with 1500 bars:
60Minute chart with 1500 bars showing.
Now it's getting interesting. Not only are we confirming the resistance at 1680, but it has been reinforced by the move on May 21st. But, now we are witnessing a possible cup formation here that could have a major potential to breakout in a significant way to the upside. But, we may have to wait for a proper 'handle' before this happens which could break the two week support and could pose a serious test to the formation. ***Update: While starting this blog post chart and research graphs it has indeed broken out to the upside on the July 18th morning, but then ended the day below the trend line and is in serious danger of breaking down***
This is why our systems look at a much larger data pool when deciding what direction to take.
My point is, when it comes to real estate, forget about long term data... There is none.
The first question you must ask is what is your investment time frame? Five... 10... 20 years? This ultimately allows you to set your data pool that you want to study. To simplify our review we are assuming if you are buying a home or an investment you are acquiring a five year mortgage. This should mean that you are concerned about what the price of your investment will be in five years.... It would be nice to see that principle actually go to equity and not be washed down the drain because the home decreased in value.
If we are working with monthly charts and we 'hold' for approximately 60 months of time then we should have a data pool of at least 1800 months (60X30). Now if you have done that math you would know 1800 months are many years of data (150 years to be precise).
How is anyone supposed to make an 'analytical' technical choice of investing in real estate when the most I can find from the Canadian MLS service HPI (Housing Price Index) is back to 2005?
All you could really say is that it has the tendency to 'go up'. Pretty bad data to make any good decisions on.
At least in our local real estate market they have tracked the average home prices and the volume of sales completed back to 1978. This gives us 4 times the amount of data. A little more helpful...
The middle line is an linear trendline just averaging the data points. Yes, I know... we live in an expensive part of the world (I'm not going to attempt to compare price to affordability!).
So at least with the above graph we can see that we are above the mean, but still little is gained but the knowledge that throughout all the crisis's in the last 35 years the average home price here has at the most 'run sideways' for extended periods.
Now this chart shows the total yearly value of sales which gives us an interesting look at the fact that we have had a huge run up of volume in the mid 2000's and it has slowly tapered off from the highs.
A little tool I LOVE using is RATIOS. Ratios tell a story that is completely unique.
Ratio Chart 1
This ratio chart is the $ volume of sales divided by the price average. Now we have something interesting to work with. You can see that one of my favorite chart patterns is forming as we speak (see my previous post on Gold). The descending triangle is a powerful formation, BUT as the chart shows there could be no resolution to the upside or downside at anytime before 2018.
If in fact this ratio does 'break down', what does that imply? That means that there is less overall volume OR that home prices are increasing OR a combination thereof. Charts tell us one thing, but put on your 'practical hat'. A measured declining triangle move should put this ratio to '0'. Frankly an impossibility. This would mean there is absolutely no volume and/or housing prices are through the roof, both an assumption that would mean the end of the financial world as we know it. So, what does this tell us? Sure, it may 'break down' but what we would practically see is a false breakout as it re surges to the upside or just frankly moves past this triangle to form a different formation in the future with.
Ration Chart 2
Another way to look at it is that it will revert back to the mean. If this ratio moves up it is just the opposite of moving down. This means that volume is up, or the value of homes are decreasing OR a combination thereof.
Recently for the first half of 2013 our local Real Estate Board reported: "While sales are up, prices remain flat. It is more important than ever to focus on the median prices." This WILL push our ratio higher for 2013 as there is more volume but prices are steady.
The volume graph shows that it is below the mean while prices are above the mean. What people forget is that you can at times 'revert' back to the mean, but you can also 'stagnate' back to the mean. If you have an 45degree mean line and you have data that has accelerated past the direction then it has the ability to just move sideways rather than move in an opposite direction to revert back to it. Look at the 'local real estate average home price' graph. Because prices have increased more than the mean it has the ability to generally move sideways to revert back to the mean, where as if it was below the mean like volume, then it MUST move up to revert back. So if you are above an up trending mean line (and you believe that any market DOES revert back to it's 'mean') then you are more likely to A. go sideways or B. go down. This is in stark contrast to if you are below the mean, you only have one option to revert back to the mean (go up).
What does this tell me? Prices are above their mean and volume is below it's mean.
Either prices will decline or go sideways AND volume of $ sales will increase.
Now, I don't mean to act like a smarty pants, but lets look closer at that ratio. What is it of again? Oh ya... $volume of total sales divided by the average home price... Doesn't that just give us the total sales of units? Your right... Does that now give you a different perspective of the ratio's 'weight', or how valuable that information is? That ratio of three is actually 3000 units sold.... Could it be that we sell less than that in any current or future year? The last time we saw less units sold was in the very early 1980's. With population increase, and the amount of new home builds we see year in / year out and intercity / inter provincial / or international immigration that we would see this number go below the 3000 units per year? Possibly, but the odds are against it...
Taking this information moving forward this means that we can expect, for possibly the next five years, that the number of units sold per year will be between 3000 and 3500 if we expect the descending triangle and support/resistance line to hold sway.
With this information it is still hard to say how this will affect prices, but it may be said that we may have reached some 'stability' in the housing market. If prices remain the same ($600,000) and we reach a high of 3500 units sold, then (funny enough) the volume $ sales would reach 2.1 $Billion which would put it right on the 'median'.
Even though John Paulson has made a terrible bet on gold recently (again, see my previous post) where he has lost 65% of value in his gold fund, he apparantly is good at finding returns in the housing market and he has recently stated, "If you already own a home, buy a second one. You won't make returns that good by investing in me". Personally I think that is a little optimistic.
The data states that the worst 10 year period (1993 to 2002) the average home value increased by 2.44%. The worst 20 year period (1982 to 2001) was an increase of 4.06%. Because of our huge runup in value between 2002 and 2007 we could see that 4.06% 20 year hold if we only average 1% a year for the next five years (basically keeping up with inflation). Is that so bad? Well, we have to live somewhere, but if it was an investment I would rather look at other products to leverage my returns...
Next up: Using business cycle, intermarket relationship theory, and technical analysis to take a long view of the current markets.
We are changing the format for our blog. This is now going to by my place to muse about what is coming across my desk in regards to technical analysis. This might include commodities, the stock markets, currencies, the economy, or whatever suits my whim at the time. Right now real estate has been in my pervue.
My family just made the investment to buy our first home. Being an entrepreneur, I previously stashed much of my 'wealth' in business, not real estate. We also had very reasonable rent. Well that all changed now. It's funny when you are invested in something how much more interested you become in the gyrations of that particular sector....
I think I may have a unique perspective. Yes, I am a self-made technical analyst (currently studying for my chartered designation - CMT), but I also own a construction company and I was the President of the local home builders association. One reason why we created computer driven trading systems at Kinship Investments was to take the emotion out of decisions and expectations. I hope with my experience in the real estate field coupled with my analytical perspective I can keep my opinion subjective even though I am now a 'locked-in investor' :-)
One thing which is very important when it comes to studying any market is data. If you only have a small amount of data, then it could alter your view. My rule of thumb is to take your average holding period and times it by 30-40 data points. This will give you a general reflection as to how much information you 'should' have to make a well reasoned analysis of the market you are studying. For example, if you use a 60 minute chart such as the one below that has an average trade time of 1.5 days then that works out to about 1500 bars. The picture below only shows about 400 bars. So you may look at this chart and say, "OK, it's in an uptrend, it possibly has an ascending triangle, RSI has come off lows, and the price recently completed a support line, so there is the potential for a long trade depending if it breaks up or it could be a short sale if it breaks down".
Now stretch out your view with 1500 bars:
Now it's getting interesting. Not only are we confirming the resistance at 1680, but it has been reinforced by the move on May 21st. But, now we are witnessing a possible cup formation here that could have a major potential to breakout in a significant way to the upside. But, we may have to wait for a proper 'handle' before this happens which could break the two week support and could pose a serious test to the formation. ***Update: While starting this blog post chart and research graphs it has indeed broken out to the upside on the July 18th morning, but then ended the day below the trend line and is in serious danger of breaking down***
This is why our systems look at a much larger data pool when deciding what direction to take.
My point is, when it comes to real estate, forget about long term data... There is none.
The first question you must ask is what is your investment time frame? Five... 10... 20 years? This ultimately allows you to set your data pool that you want to study. To simplify our review we are assuming if you are buying a home or an investment you are acquiring a five year mortgage. This should mean that you are concerned about what the price of your investment will be in five years.... It would be nice to see that principle actually go to equity and not be washed down the drain because the home decreased in value.
If we are working with monthly charts and we 'hold' for approximately 60 months of time then we should have a data pool of at least 1800 months (60X30). Now if you have done that math you would know 1800 months are many years of data (150 years to be precise).
How is anyone supposed to make an 'analytical' technical choice of investing in real estate when the most I can find from the Canadian MLS service HPI (Housing Price Index) is back to 2005?
All you could really say is that it has the tendency to 'go up'. Pretty bad data to make any good decisions on.
At least in our local real estate market they have tracked the average home prices and the volume of sales completed back to 1978. This gives us 4 times the amount of data. A little more helpful...
The middle line is an linear trendline just averaging the data points. Yes, I know... we live in an expensive part of the world (I'm not going to attempt to compare price to affordability!).
So at least with the above graph we can see that we are above the mean, but still little is gained but the knowledge that throughout all the crisis's in the last 35 years the average home price here has at the most 'run sideways' for extended periods.
Now this chart shows the total yearly value of sales which gives us an interesting look at the fact that we have had a huge run up of volume in the mid 2000's and it has slowly tapered off from the highs.
A little tool I LOVE using is RATIOS. Ratios tell a story that is completely unique.
This ratio chart is the $ volume of sales divided by the price average. Now we have something interesting to work with. You can see that one of my favorite chart patterns is forming as we speak (see my previous post on Gold). The descending triangle is a powerful formation, BUT as the chart shows there could be no resolution to the upside or downside at anytime before 2018.
If in fact this ratio does 'break down', what does that imply? That means that there is less overall volume OR that home prices are increasing OR a combination thereof. Charts tell us one thing, but put on your 'practical hat'. A measured declining triangle move should put this ratio to '0'. Frankly an impossibility. This would mean there is absolutely no volume and/or housing prices are through the roof, both an assumption that would mean the end of the financial world as we know it. So, what does this tell us? Sure, it may 'break down' but what we would practically see is a false breakout as it re surges to the upside or just frankly moves past this triangle to form a different formation in the future with.
Another way to look at it is that it will revert back to the mean. If this ratio moves up it is just the opposite of moving down. This means that volume is up, or the value of homes are decreasing OR a combination thereof.
Recently for the first half of 2013 our local Real Estate Board reported: "While sales are up, prices remain flat. It is more important than ever to focus on the median prices." This WILL push our ratio higher for 2013 as there is more volume but prices are steady.
The volume graph shows that it is below the mean while prices are above the mean. What people forget is that you can at times 'revert' back to the mean, but you can also 'stagnate' back to the mean. If you have an 45degree mean line and you have data that has accelerated past the direction then it has the ability to just move sideways rather than move in an opposite direction to revert back to it. Look at the 'local real estate average home price' graph. Because prices have increased more than the mean it has the ability to generally move sideways to revert back to the mean, where as if it was below the mean like volume, then it MUST move up to revert back. So if you are above an up trending mean line (and you believe that any market DOES revert back to it's 'mean') then you are more likely to A. go sideways or B. go down. This is in stark contrast to if you are below the mean, you only have one option to revert back to the mean (go up).
What does this tell me? Prices are above their mean and volume is below it's mean.
Either prices will decline or go sideways AND volume of $ sales will increase.
Now, I don't mean to act like a smarty pants, but lets look closer at that ratio. What is it of again? Oh ya... $volume of total sales divided by the average home price... Doesn't that just give us the total sales of units? Your right... Does that now give you a different perspective of the ratio's 'weight', or how valuable that information is? That ratio of three is actually 3000 units sold.... Could it be that we sell less than that in any current or future year? The last time we saw less units sold was in the very early 1980's. With population increase, and the amount of new home builds we see year in / year out and intercity / inter provincial / or international immigration that we would see this number go below the 3000 units per year? Possibly, but the odds are against it...
Taking this information moving forward this means that we can expect, for possibly the next five years, that the number of units sold per year will be between 3000 and 3500 if we expect the descending triangle and support/resistance line to hold sway.
With this information it is still hard to say how this will affect prices, but it may be said that we may have reached some 'stability' in the housing market. If prices remain the same ($600,000) and we reach a high of 3500 units sold, then (funny enough) the volume $ sales would reach 2.1 $Billion which would put it right on the 'median'.
Even though John Paulson has made a terrible bet on gold recently (again, see my previous post) where he has lost 65% of value in his gold fund, he apparantly is good at finding returns in the housing market and he has recently stated, "If you already own a home, buy a second one. You won't make returns that good by investing in me". Personally I think that is a little optimistic.
The data states that the worst 10 year period (1993 to 2002) the average home value increased by 2.44%. The worst 20 year period (1982 to 2001) was an increase of 4.06%. Because of our huge runup in value between 2002 and 2007 we could see that 4.06% 20 year hold if we only average 1% a year for the next five years (basically keeping up with inflation). Is that so bad? Well, we have to live somewhere, but if it was an investment I would rather look at other products to leverage my returns...
Next up: Using business cycle, intermarket relationship theory, and technical analysis to take a long view of the current markets.
Protect yourselves,
Lee MacFarlane
Derivatives Trader - President
Kinship Investments Ltd.
office (250-385-9132)
fax (250-385-9134)
Derivatives Trader - President
Kinship Investments Ltd.
office (250-385-9132)
fax (250-385-9134)
check us out on 
Legal:
Past performance is not necessarily indicative of future trading results.
Lee MacFalane is a derivatives trader trained under the Canadian Securities Institute and is working toward his CMT designation under sponsors with the CSTA (www.csta.org). He manages Kinship Investments, a Private Managed Fund (working under the Capital Raising Exception Act of the BCSC). Kinship Investments is not an advisory service and does not provide investment advice. This blog represents Lee MacFarlane's opinions only and is not intended to be used as investment advice. Lee MacFarlane and Kinship Investments may or may not hold securities that are discussed in this blog. Please contact lee@kinshipinvestments.com for further information or go to www.kinshipinvestments.com/trustfund.html to view our latest results.
Lee MacFalane is a derivatives trader trained under the Canadian Securities Institute and is working toward his CMT designation under sponsors with the CSTA (www.csta.org). He manages Kinship Investments, a Private Managed Fund (working under the Capital Raising Exception Act of the BCSC). Kinship Investments is not an advisory service and does not provide investment advice. This blog represents Lee MacFarlane's opinions only and is not intended to be used as investment advice. Lee MacFarlane and Kinship Investments may or may not hold securities that are discussed in this blog. Please contact lee@kinshipinvestments.com for further information or go to www.kinshipinvestments.com/trustfund.html to view our latest results.
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