So what will happen to the real estate sector during a stagflationary depression? During the Great Depression of the 1930s real estate was one of the worst performing asset classes. There is another book I recommend called The Great Depression: A Diary by Benjamin Roth who was an attorney in Youngstown, Ohio. He documented his impressions in a diary from the period just before the stock market crash through its aftermath. He talks about real estate quite a bit. From the book’s preface:
He also began to see that even though real estate seemed like a reliable investment—it is finite, tangible, and can be self-financing by charging rent—in a prolonged downturn, it could be devastating. The costs of upkeep, taxes, mortgage payments, and insurance are usually inflexible, whereas rental income could easily dry up if renters don’t have jobs. All around him buildings were being torn down because the owners would rather lose their investment than be forced into bankruptcy by their inability to pay property tax.
Here are some other interesting snippets:
But what about the 1970s Stagflation? Didn’t properties go up in value? Yes they did. In the 1970s, the median home price rose from $23,000 to $55,700, an average annual gain of 9.9%1. But one must remember that this is in nominal terms. Accounting for inflation during that period, the appreciation on a home was just 1.2% on an annual basis in real terms. But at least it was a positive return right?
Real Estate:
The real estate industry contributed nearly 17% of the national GDP in 2021. The sector includes everything from homebuilders, brokerage firms, real estate service companies, and investment trusts. Its a big sector of the economy. The recent run-up in housing prices following the COVID-19 pandemic has been breathtaking. Will the gains last? Let’s see what the waves tell us.
Homebuilders Index, XHB
Let's start with the homebuilders which typically lead the housing market by 8-10 months2. Here we'll look at the exchange traded fund XHB which tracks the S&P Homebuilders Index. It has already completed a large 5 wave structure and is working on an intermediate wave (C) of Primary A of Cycle IV. There may be a bounce of sorts but Primary Wave C will be devastating for homebuilders.
Lennar Corporation
Lennar is the second largest homebuilder in the US after D.R. Horton (DRI) based on the number of homes sold and operates in more than 20 states. It has more price history than DRI so it should add more clarity and confidence to our XHB count. Here we see again that the top is in and a much larger correction has begun for Cycle II.
AirBnB
Airbnb operates an online marketplace focused on short-term rentals and experiences. The company acts as a broker and charges commissions from each booking. Many people have gotten into this game these past few years and purchased multiple properties on leverage to gain income. Sounds a bit dangerous going into a stagflationary depression in my opinion but lets see what the chart says. A triangle pattern broke down in May and share price is in an impulsive looking downward expanding diagonal targeting 60-70% declines if it fully fills out. Expanding diagonals in bear moves do tend to have resolve bullishly but will that be just a Primary Wave 2 before going much lower later this decade? Its uncertain. Note there is not a lot of price history for this so we will have to keep our eye on it.
Redfin
Redfin operates a residential real estate brokerage in 95 markets in the US and Canada and in other markets via partner/referral agents. They make money by charging sellers below-average fees of 1.0-1.5% of the sales price of a property, in addition to fees to the buyer's agent of 2.5-3.0%. They also provide commission rebates to purchasers of homes that use their service. I recommend you dump the old coffee out of your “cup” for this one and refill. Its share price is now making its fifth wave down after an upside down cup-and-handle breakout in its first intermediate cycle. Its long term wave structure is uncertain. It needs to survive wave 5 first. Not a great look for the housing market.
OpenDoor
Now lets look at another new company in the housing space. OpenDoor (OPEN) is an online company that buys and sells residential real estate in 44 markets in the US. It makes instant cash offers on homes through an online process, makes repairs on the properties it purchases, and relists them for sale. It also provides mobile application-based home buying services along with financing. Like AirBnB and Redfin there isn’t a lot of price history to make any long term conclusions but near term the picture is ugly. Its currently making a 5 wave down structure in the Minor degree and is in the heart of wave 3. Its uncertain whether the top channel will be valid but I put it there to monitor. Wave 5 extensions could take OPEN’s hare price to pennies. Its long term future is also uncertain.
Annaly Capital Management
Annaly (NLY) is among the world’s largest Real Estate Investment Trusts (REITs) with a diversified portfolio which includes agency mortgage-backed securities, mortgage servicing rights, and residential real estate. In Part 7 I’ll take a look at Mortgage Backed Securities on their own but lets see if NLY can give us some clues. Here we see it descending within a very large ending diagonal (wedge pattern). This pattern could resolve bullishly but not before more downside since it still needs to complete a final Intermediate wave (5). Yikes! The hits in the real estate sector just keep coming!
Home Depot
Finally lets look at Home Depot (HD). I just as easily could of included HD in Part 4 for consumer retail related companies but its business is closely tied to the housing sector so Part 6 seemed to be a better place for it. Many homeowners and contractors shop there for home improvement supplies to accommodate home repair and remodel. The HD wave structure also confirms a major top has been struck and share price has now entered a larger degree correction in the Primary degree for Cycle II. It will be buying opportunity for the very patient at some point but I have no idea when that will be. Price has to consolidate some of the amazing gains that its had first.
Summary and Observations
This doesn’t look pretty does it? This picture is more bleak than the Banks which we reviewed in Part 2. Everything we have looked at in this sector has topped already and are now in bearish declines. We are already seeing headlines about falling home prices. I cringe to think what will happen to housing when the banking sector seizes up as discussed in Part 2. Before we wrap this report up, one will likely ask (because I did), can we apply Elliott Waves to housing prices themselves? We sure can. TradingView only had data going back to the early 2000s so I had to do this analysis manually. I compiled 70 years of monthly home price data and plotted CPI (Consumer Price Index) adjusted home prices (based on 2022 dollars).
Here we see 5 clear waves up with the 500% Fibonacci extension marking the 2006 Wave 3 top and more recently the 800% extension was reached for the recent top this year. Quite amazing if you ask me! Fibonacci sequences appear everywhere in nature and they also exist on CPI adjusted house prices. The generational housing top is in folks. Its only a question of how deep and long the correction will take. I added some Fib retrace levels and a trendline to the chart but I personally would watch the homebuilders to see when the bottom is struck which could take some time. Then wait 8-10 months before buying any investment property or related shares. This analysis answers the question we asked at the beginning of this report on whether inflationary or deflationary forces would be the bigger driver during the upcoming stagflationary depression. Clearly the answer is deflation. Banks will fail, people will lose their jobs and struggle with higher costs of food and essentials, renters may not pay rent, and as we’ll see in Part 7 when we look at bond funds like the TLT and MBM, interest rates will continue to trend higher. It makes sense to me at least that housing will suffer greatly as a result of all these contributing factors. The charts agree.
Scorecard:
As I mentioned earlier when discussing the charts for AirBnB, Redfin, and Opendoor, there is not a lot of price history to make long term assessments on their Elliott wave structures so I listed these as uncertain. The rest are bearish.
Well that does it for Part 6. I hope you found it informative! I certainly did after completing the analysis for it. In Part 7 we will look at the Bond market. A lot has been going on there lately so it should be pretty interesting.
Until then…
Cheers and #EndTheFed
-Hypersonic78
https://magazine.realtor/news-and-commentary/economy/article/2021/05/a-taste-of-the-1970s
Prechter, Robert R. The Socionomic Theory of Finance. United States, Socionomics Institute Press, 2016.