In the world of technical analysis there are many different ways to define a trend. Of them all, I tend to rely on one of the simplest – the “highs and lows” method.
An uptrend is characterized by successively higher peaks. In analyst-speak, that’s “higher highs.” Also, uptrends are confirmed by successively higher troughs, or “higher lows.” Of course the reverse is true for downtrends (i.e. lower highs and lower lows).
Many people, when describing the housing market during the ’90s and early 2000s, probably referred to the housing boom as “the housing trend.” But that characterization is flawed.
In fact, the good years in the property market were an aberration. The pickup in activity was a COUNTER trend phenomenon. And countertrends are always temporary. Let me explain what I mean…
Here’s a chart of the percentage of all U.S. workers employed in the housing industry. From 1956 to 1992, this measure was clearly in a downtrend. I’ve marked the lower highs with green circles and the lower lows with blue circles.
It wasn’t that no homes were being built. It was that the relative importance of this industry was waning.
Then the surge came in 1992. The percentage of workers in the housing industry shot higher, breaking the sequence of lower highs and lower lows.
In the 2000s, it would have seemed a new trend – an uptrend – was developing. But this couldn’t be confirmed until both higher highs and higher lows could be discerned. We saw the higher highs, with housing employment shooting to nearly 5.5%. But we never got the higher lows.
Now that this measure has tanked we see lower lows again – characteristic of a downtrend resuming.
You see the exact same pattern if you look at a chart of housing investment as a percentage of total U.S. GDP, shown here:
Again, this chart is making lower lows, showing the downtrend in housing has resumed.
Harry and Rodney have pointed out a number of logical reasons why the housing market will never be what it was. Technology advancements have reduced the number of workers needed to construct homes and the demand from Echo Boomers is much weaker than was the demand from Baby Boomers who fueled the bubble in the first place.
Regardless of the reasons, the charts say it all. Taking a long-term perspective it becomes obvious housing is in a persistent, downward trend… even after a 15-year countertrend boom.
Don’t be fooled by talk of a “recovery.” This market isn’t dead, but its stimulatory effect on the economy is most definitely fading.
If you haven’t done so already read the Survive & Prosperissue on “The signs of a housing recovery are everywhere – Home Sales are Up!”