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The Coming "Bull Trap" in Housing / per Conf. Call #3

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Can I throw into the discussion mix the impact of the collapse of sterling?

 

For those of us coming from a euro perspective (or USD, etc), when coupled with price drops this has effectively made the cost of UK real estate near 50% off of what we would have had to pay just 18 months ago!

 

As a result I find myself thinking about buying in London simply on the basis that the euro/sterling currently presents a discount that one may not see in the future, and even with dead cat bounce, if euro craps, then I am still worse off.

 

Of all the predictions I've read for HPC in UK, few seem to think more than 50% off peak. Why not lock that in right now if one can?

 

It might be a whole lot safer to just buy some Sterling and wait another 2 years or so.

Or maybe even a Call option on Sterling, which could fall further

 

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I see, so this dead cat bounce will push up nominal house prices for a certain period of time.

Do you have any forecast as to what amount of drop there will be in nominal terms by 2011 or 2012?

 

I have a very precise "best guess", and that is that the Nationwide index will fall -46% from the top.

Do remember, it is only a guess.

 

Pds.186,000 x 54% = Pds. 100,000 on the Low ?

 

Hong Kong fell 69% from 1997 to 2003, and I wouldnt rule out a similar fall, maybe a fibonacci 61.8%

in the UK. (Note: 186,000 x 38.2% = Pds. 71,052 )

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Wainhomes have recently completed homes on 4 separate sites within a two mile radius of where I live. Out of curiosity I looked on the web at the asking prices for the new developments I walked past this evening. Newbuild three storey 2 bed "townhouses" packed very very close together £180,000 to 5 Bed detatched £640,000!!! These are the sort of prices I saw at the peak of the market while living and working in the South East. I can't see many people in this part of the country in this economic climate being foolish enough to pay even half those asking prices. It really makes me wonder how short lived the bull trap will be and the dead cat bounce in builders shares. For the last few weekends these have been subbies working Saturday and Sunday perhaps in an attempt to finish before Easter.

 

That seems to the message, hence my bounce theory, but due to lack of forward visibility, hard to forsee past next month.

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I have a very precise "best guess", and that is that the Nationwide index will fall -46% from the top.

Do remember, it is only a guess.

 

Pds.186,000 x 54% = Pds. 100,000 on the Low ?

 

Hong Kong fell 69% from 1997 to 2003, and I wouldnt rule out a similar fall, maybe a fibonacci 61.8%

in the UK. (Note: 186,000 x 38.2% = Pds. 71,052 )

 

I don't see the housing market as that technical. The vast majority of homeowners have never even heard of fibonacci retracement. It's all about sentiment and mortgage availability. I think we'll be comfortable that we've seen the bottom in stocks and the peak in unemployment before we the housing market has bottomed out.

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I don't see the housing market as that technical. The vast majority of homeowners have never even heard of fibonacci retracement.

It's all about sentiment and mortgage availability. I think we'll be comfortable that we've seen the bottom in stocks and the peak in unemployment before we the housing market has bottomed out.

 

Haha. Of course they never heard of fibonacci. Price moves are a reflection of human sentiment, and the cycles of sentiment trace out these patterns. And it has always been like that, whether people were watching the fibonacci points and trendlines at all.

 

I know it sounds unbelievable at first, but I have seen these patterns develop so many times (to within a percent or two of my calculations), that I have confidence in using them as part of my arsenal of technical tools. If you study enough price moves , and calculate the Turn points, you will see what I mean.

 

HOUSEBUILDER SHARE PRICES will reflect changing sentiment FASTER than actual property prices, which is why they give "early" warnings of trend changes:

 

"The beleaguered UK housebuilding sector received a welcome boost in the latest industry data,

which not only shows house prices rising for the first time since October 2007 but also a slowdown in the rate of decline in the overall construction sector.

 

Sentiment was also lifted as shares in troubled housebuilder Taylor Wimpey surged more than 20pc, closing up 5½p at 29p, after the company moved closer to a deal to restructure its debt.

 

The entire housebuilding sector rose on the back of figures from Nationwide Building Society showing that UK house prices rose in March for the first time in 16 months. Barratt Developments gained 20pc to 107p, Bellway gained 9pc to 780p, Bovis Homes added 8pc to 458p, and Persimmon added 12pc to 405¼p.

 

/more: http://www.telegraph.co.uk/finance/newsbys...-show-rise.html

 

...more...

 

"Despite the enthusiastic reaction amongst investors, it is far from clear that a recovery in the housing market is imminent. Nationwide cautioned that it would be unwise to read too much into the latest figures, saying it is too soon to say whether a trough in the market had been reached. It added that it would take time for the Government's stimulus measures such as interest rate cuts to trigger a "sustained recovery" in house prices."

 

(I have news for them: there is not going to be a "sustained" recovery in home prices. Not for several years, but nonetheless a nice upwards correction is starting. Just as people think it is going to be sustained, it will be undermined by negatives like rising rates, and falling rentals.

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Haha. Of course they never heard of fibonacci. Price moves are a reflection of human sentiment, and the cycles of sentiment trace out these patterns. And it has always been like that, whether people were watching the fibonacci points and trendlines at all.

 

I know it sounds unbelievable at first, but I have seen these patterns develop so many times (to within a percent or two of my calculations), that I have confidence in using them as part of my arsenal of technical tools. If you study enough price moves , and calculate the Turn points, you will see what I mean.

 

For me, fibonacci retracement only works if enough people use it, which is why we see them in liquid markets which are dominated by sophisticated traders. Do you mean that there's something inherently psychological about these retracement levels?

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For me, fibonacci retracement only works if enough people use them, which is why we seem them in liquid markets which are dominated by sophisticated traders. Do you mean that there's something inherently psychological about these retracement levels?

 

SURE. You find these numbers are over nature. I dont think people spoke about fibonacci ratios before the 1970's. Go back and look at charts of 50 or 100 years ago, and you will find the ratios in stock prices.

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SURE. You find these numbers are over nature. I dont think people spoke about fibonacci ratios before the 1970's. Go back and look at charts of 50 or 100 years ago, and you will find the ratios in stock prices.

 

I see a big difference in the strategies used by stock investors and property investors. A large percentage of money on stocks is invested by people who use fib retracement, but virtually no money from property investors uses it. It works as a self-fulfulling prophecy, but only if the message is widespread enough. The only fib level that I can see having any significant impact in the housing market is 50%.

 

I'll look into the history of fib ratios, because I can't see that they'd have an impact before they were widely used.

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I'll look into the history of fib ratios, because I can't see that they'd have an impact before they were widely used.

 

Gann published in 1935 and was active in market trading circles in 1909.

Elliot published in 1938, his theory uses fibonacci ratios.

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Does your prediction take into account the possible rise in interest rates that may or may not happen?

 

My expectation is this:

 

1/ Prices will be pushed higher by "bargain hunters" taking advantage of low rates, and the talk they will be hearing that we will soon see the bottom in the UK econoimic cycle, Surging stock prices may help build this confidence,

 

2/ There will be a decent recovery, lasting for several months, maybe even a year, when prices will bounceback perhaps by 6-10% off their lows.

 

3/ Then the recovery will be undermined by rising rates and/or rising unemployment

 

4/ A deeper slide towards the final bottom will begin. This will be lower. probably much lower than the low of the first half of 2009.

 

So to answer your question, rising rates are part of steps 3 and 4 in this scenario

 

This is very interesting (albeit a bit depressing), but does Dr Bubb think there's enough cash around to create a sizeable bounce? I know we've had a little hiccup since Christmas, but the general view seems to be that this was caused by cash-rich sideliners deciding to step in and bag a 'bargain'. There's clearly a limit to how much damage these people can do to our cause. The only way I see real rises occurring over a significant timespan is if the Government and BoE conspire to make magic money available in massive quantities to first time buyers - and actually succeed. Am I missing something?

 

I dont see things that way at all. The market is not there to support "causes" or make you or your friends winners or losers. It has a nature of its own, and its best to understand it, so you can live in harmony with the nature of the market. It doesnt move in straight lines for long. And it has already been operating at "crash cruise speed" for quite a few months. Sentiment has become very negative now, and a bounce is due.

 

The Builder stocks are telling us, the bounce is likely to start very soon. And maybe it is underway already.

 

I am warning you now because I hope that if you see the bounce, you will them believe me when many people start telling you: "The low is in - Dont miss out on the bargains." And then you will believe me in 6-9 months when I insist the bottom is certainly not in yet.

 

There are also some people who sat out from buying, but aren't as rabidly "pro-HPC" as people on here (myself very much in that rabid grouping), and some of them are clearly coming out, with good (public sector?) jobs, good deposits, and able to get the house they want at 20% or so off the peak. But I suspect they are few in number. They'll cause a big rise in registered interest at estate agents, but will be very picky.

 

Yes. And some foreigners too, who find that the combination of lower house prices and lower Sterling makes UK house prices look doubly cheap - like over 50% off their highs.

 

The only thing that can stop that is serious (8% or higher inflation) that is accompanied by wage settlements. I can see the inflation is possible, but can't see those sort of wage settlements coming through until 2014 at the earliest (because the private sector has to compete against poorer nations for the same work). Furthermore, if the inflation comes the interest rates will be 9% per annum, and those large mortgage multiples won't be affordable.

 

I agree, we are not going to see demand pull" inflation driven by higher wages. If we see inflation, we will see "cost push" inflation driven by higher food and energy prices. This type of inflation will eventually put interest rates up, and will HURT, not help property prices.

 

Some fools (who dont understand these basics) will buy property thinking it will benefit from inflation. They may do alright in the US where mortgage rates can be easily fixed for 20-30 years, but tehy are likely to get hammered by inflation and higher rates in the UK.

 

 

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I've not managed to find anything on the history of fib ratios in markets, but:

Gann published in 1935 and was active in market trading circles in 1909.

Elliot published in 1938.

 

Okay.

But that proves my point. They used the ratios to make money because fibonacci ratios were showing up in price moves.

 

But these remained fringe ideas, understood and used by few, until Prechter became well know, and published The Elliottwave

Principle in the late 1970's.

 

That's my opinion anyway.

 

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Okay.

But that proves my point. They used the ratios to make money because fibonacci ratios were showing up in price moves.

 

But these remained fringe ideas, understood and used by few, until Prechter became well know, and published The Elliottwave

Principle in the late 1970's.

 

That's my opinion anyway.

 

Yeah, I see your point, it's a bit of a chicken and the egg situation. Perhaps, some of it's psychological, but the rest is self-fulfilling prophecy. Whether the early momentum came from ill-founded notions or not, they work because other people use them. I use TA for liquid markets, but my opinion is that only the most naive TA is relevant to the housing market.

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Fibonacci retracement ratios show up in nature

Yeah, I see your point, it's a bit of a chicken and the egg situation. Some of it's psychological and some is self-fulfilling prophecy.

 

Okay. Now it is.

But look back at prices before 1909, and you will find these patterns too. In fact, you will find them

even before Leonardo Fibonacci was born in Pisa, Italy in the 1300's.

 

"Margin Calls"

I thought this was going to happen last summer and posted my thoughts on HPC (http://www.housepricecrash.co.uk/forum/index.php?showtopic=76232).

Looks like the banks got round to it eventually though......

http://www.ft.com/cms/s/2/cdc24a48-2078-11...144feabdc0.html

 

This is big news.

"The banks’ requests have come as lenders start exercising little-known clauses that allow them to demand additional funds if the owner’s equity shrinks in relation to the value of the property.

Plummeting property prices mean landlords who paid little notice to these hidden clauses when the market was booming are falling foul of the rules."

 

The banks may lean on their clients, if we see a property price bounce short term.

But they will hammer hard, if rates rise isometimes in 6-12 months. Then the really "nasty part" of the downwards cycle will begin.

 

 

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Why was one not observed in the US, they are a year ahead of the UK and their prices were far less inflated than ours, yet they have consistently fallen month on month and just recently reached a record YOY rate of fall.

 

I could well believe the US is getting close to stabilising but the UK is still massively inflated relative to the money available to buy them.

 

A good question, and there's a good answer for it, I think.

The UK panicked fewer months into its downturn, and pushed rates to historic lows after only a 20% drop.

The US monetary authorities "hit the panic button" as the drop approached 30%.

 

Now what does this mean? Once the "dead cat bounce" is out of the way (let's say by year end), then

the UK will still have far further to fall, and over a longer time, than the US. There's a decent chance that

teh US will make its low in 2010 or 2011 with a retest of early 2009 lows, and maybe go a bit lower.

While the UK may plummet after that for another year longer, after the US low is in place.

 

That second "nastier" leg down, should be considered as a "gift" of the wasteful Mr.Gordon Brown,

whose policies will be most to blame for the awful price drops that the UK is likely to see by 2012-13.

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Fibonacci retracement ratios show up in nature

 

Okay. Now it is.

But look back at prices before 1909, and you will find these patterns too. In fact, you will find them

even before Leonardo Fibonacci was born in Pisa, Italy in the 1300's.

 

I'm in interested in any reference material you have on this.

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I'm in interested in any reference material you have on this.

 

I plan to start a thread on Larry Pesevanto's techniques. Perhaps we can discuss it there

 

Meantime, take a look at the Gartley pattern:

http://www.traderslog.com/gartley-pattern.htm

 

"The next step in the development of this pattern was the addition of the mathematical relationships of Sacred Geometry (which includes the Fibonacci Summation Series). Adding the Fibonacci Ratios to this pattern gave the Pattern Recognition Swing Trader the tools to determine price entry, exit points and stop levels for risk control. The final step was empirically and statistically testing the validity of these patterns. Gartley had emphasized that the pattern was correct approximately 70% of the time. Testing weekly, daily and intraday patterns over the past 40 years has proven that Gartley’s original premise was indeed accurate."

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I plan to start a thread on Larry Pesevanto's techniques. Perhaps we can discuss it there

 

Meantime, take a look at the Gartley pattern:

http://www.traderslog.com/gartley-pattern.htm

 

"The next step in the development of this pattern was the addition of the mathematical relationships of Sacred Geometry (which includes the Fibonacci Summation Series). Adding the Fibonacci Ratios to this pattern gave the Pattern Recognition Swing Trader the tools to determine price entry, exit points and stop levels for risk control. The final step was empirically and statistically testing the validity of these patterns. Gartley had emphasized that the pattern was correct approximately 70% of the time. Testing weekly, daily and intraday patterns over the past 40 years has proven that Gartley’s original premise was indeed accurate."

 

I was referring to a reference on fib ratios in markets before 1900's.

 

The link you give says that Gartly was pretty much at exaclty the same time to Gann and Elliot:

 

Gartley stated in his 1935 masterpiece that over a 30 year period...

 

I don't doubt the occurance of Fib ratios in modern liquid markets. Only the application of them to less sophisticated markets where they don't have widepread intentional use by the market participants, such as the housing market.

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My expectation is this:

 

1/ Prices will be pushed higher by "bargain hunters" taking advantage of low rates, and the talk they will be hearing that we will soon see the bottom in the UK econoimic cycle, Surging stock prices may help build this confidence,

 

2/ There will be a decent recovery, lasting for several months, maybe even a year, when prices will bounceback perhaps by 6-10% off their lows.

 

3/ Then the recovery will be undermined by rising rates and/or rising unemployment

 

4/ A deeper slide towards the final bottom will begin. This will be lower. probably much lower than the low of the first half of 2009.

 

So to answer your question, rising rates are part of steps 3 and 4 in this scenario

 

...

 

Why do you think the recovery could last up to a year?

 

I think BDEV and TW could have a good recovery for a few months but I cannot see house prices rising for more than 2/3 months in a row.

 

These are my reasons:

 

** The longest period of rises during the 1990’s was 5 months, Feb - Jun 1992. Falls resumed through Jul and Aug. Sep 1992 was back below the Feb 1992 price

 

** And RPI was positive throughout this period. This time RPI is close to zero and may even turn negative

 

** The SA data for the above months shows MoM of +0.3%, -0.9%, +0.3%, -0.0% (Mar-Jun) i.e. there was only 2 months of price rises in this period, they weren’t consecutive

 

** The MoM price changes have been much larger during this crash. >1% per month is the norm. The rises (shown by Nationwide and Halifax) have also been surprisingly large.

 

** There’s no dead cat bounce in the USA (yet?)

 

I agree, we are not going to see demand pull" inflation driven by higher wages. If we see inflation, we will see "cost push" inflation driven by higher food and energy prices. This type of inflation will eventually put interest rates up, and will HURT, not help property prices.

...

 

‘Record low interest rates’ are Gordon Browns proudest achievement. I don’t think the independent BofE will be allowed to raise interest rates.

 

Inflation will cause a large discrepancy between real and nominal house prices.

 

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(This is from the clone thread on HPC. I may add it to the header post also)

 

Good post. It think it is very clear.

 

The first is to compare an asset's price to its value. Sell when prices are above value and buy when prices are below value. This is fundamental analysis...

 

The second is to predict an asset's future price movement by examining its past behaviour. This is technical analysis. As Noel points out, some technical analysis can become a very crowded trade, especially in a bubble. A very simple rule that many housing investors seem to have followed is to buy houses whenever prices have risen for three months in a row. It is easy to see how this rule can lead to a bubble when everyone follows the same rule and does the same thing. It is also easy to see how this can end in tears when the last buyer has bought.

 

Excellent investors are able to combine the two in a hybrid approach. They are able to overcome their distaste for expensive (price relative to value) assets because the "price action" in the market tells them that it doesn't matter. They are also able to delay buying cheap assets because of the horrible price action.

. . .

In a very round about way, I am saying that the technical analysis of house prices might suggest that they are due for a bounce according to some. My view is that the fundamental analyis of value relative to prices suggests that the size of the possible bounce is not investable for such an illiquid asset as it is not taking place at a price level which shows that house prices represent fundamental value.

 

Something I do in my own investing, is I look for "parallel markets" that give early clues.

 

So in the case of UK residential property, the homebuilders have give a series of good early clues over many years. My basic signal would be when the Builder Bellwether Index (of 5 housing stocks) breaks thru the 252day (One year) moving average

 

Builder Bellwether Index (BBI) / update: http://www.houseprices.uk.net/articles/house_builders_index/

housebuilders.png

 

It looks like it is happening now. If I am too busy to calculate this index, then I will use:

 

Barratt Developments (BDEV.L) ... update - break looks set to happen

aa6x.gif

 

Berkeley Group (BKG.L) ... update - break has already happened, some weeks ago

aa5.gif

 

Or: Persimmon (PSN.L- has given "buy"), or Taylor Wimpey (TW.L -not yet)

 

When a majority of these have broken above the 252d.MA, then I get a signal. I had a one or two day "false signal" of a breakdown in the BBI back in October 2005. But it was quickly reversed, and went back into an upmove until Q2.2007, when it (accurately) signalled a top. I am seeing the first Buy signal now, and it looks like it is coming with enough volume and momentum that it is unliekly to be reversed.

 

Like LuckyOne, I think UK home prices are overvalued, and it would be far too dangerous to "buy the bounce". Transaction costs are too high, and it is slow process to sell, so I am recommending that would be home buyers ignore the "buy" signal, and stay on the sidelines. It may feel good to be ahead, watch your home value go up for 6-9 months (if we see that), but is it really worthwhile to find yourself locked in, if we see a resumption of the downtrend? The other dangerous posibility is that "the bounce" will be very short lived, only a month or two. If that happens, you may find yourself losing money on your UK home even before the closing has happened.

 

Do be careful.

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(This is from the clone thread on HPC. I may add it to the header post also)

 

So in the case of UK residential property, the homebuilders have give a series of good early clues over many years. My basic signal would be when the Builder Bellwether Index (of 5 housing stocks) breaks thru the 252day (One year) moving average

 

 

Bubb,

 

You have written before that you see a bottom being "When the average of the 4 top Builder stocks breaks above the 12 month moving average. After you see that, you should have about 6-12 months to the low."

 

So if the stocks shoot through the 252 MA we could be 6-12 months off a bottom.

 

My guess is that in a few weeks or by May the rally in builders' stocks (and most EMs) will have petered out, so this is merely a false dawn, and the MA may be pierced but not any movement will not be sustainable.

 

You have also written that before we see a low we need to satisfy the following criteria:

 

"+ 3 to 5 years from the top (ie. 2010-12)

+ Yields above interest rates (= Buying cheaper than Renting)

+ Most foreclosures washed through the system

+ A serious rally in Builders has already happened. (trading above the 252d.MA)

probably:

+ US property prices at least 6-12 months before an upswing."

 

I agree with all of these and frankly and idea that we have a bottom is not worth the air-time, other than to help people not get their fingers burnt!

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THANKS for recalling these details of prior forecasts:

 

Bubb,

You have written before that you see a bottom being "When the average of the 4 top Builder stocks breaks above the 12 month moving average. After you see that, you should have about 6-12 months to the low."

 

So if the stocks shoot through the 252 MA we could be 6-12 months off a bottom.

 

My guess is that in a few weeks or by May the rally in builders' stocks (and most EMs) will have petered out, so this is merely a false dawn, and the MA may be pierced but not any movement will not be sustainable.

 

You have also written that before we see a low we need to satisfy the following criteria:

 

"+ 3 to 5 years from the top (ie. 2010-12)

+ Yields above interest rates (= Buying cheaper than Renting)

+ Most foreclosures washed through the system

+ A serious rally in Builders has already happened. (trading above the 252d.MA)

probably:

+ US property prices at least 6-12 months before an upswing."

 

I agree with all of these and frankly and idea that we have a bottom is not worth the air-time, other than to help people not get their fingers burnt!

 

I'm not really CHANGING any of that, just trying to clarify, as events play out.

It looks like a rally is coming "too early" and from "too high a level", and so I expect it will be a mere "Dead Cat bounce" in the UK.

 

I want to get the word out, so people will be more inclined to resist the temptation to buy.

 

Rising rates, or falling disposable incomes, could easily kill this brief rally

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