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Step 1: Identify powerful leading indicators
The big three; building permits, housing starts, and new homes sales are the most reliable for predicting housing market health in the U.S. released once every month respectively, the data associated with the indicators can be freely downloaded from the Internet.
Once housing-related indicators start to trend one way over an extended period, house prices stall and then reverse in the opposite direction. Once housing-related indicators start to trend one way over an extended period, house prices stall and then reverse in the opposite direction.
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Step 2: Use the stock market as an indicator
What we’ve learned is the stock market can predict a housing crisis long before the crash occurs. It’s also important to remember that real estate and housing stocks follow the leading indicators we’ve utilized and not the stock market as a whole because the former is the most accurate barometer of housing sector health.
In the U.S., the S&P500 index is the main barometer of the economic health, composed of the top 500 U.S. blue-chip companies — some housing related.
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Step 3: Assessing the market’s liquidity
Interest rates and credit spreads play a considerable role in the availability of credit to build houses.
Most consumers and businesses don’t just buy a plot of land upfront with capital; mainly because the average joe doesn’t have $500,000 in cash to blow on real estate.
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Step 4: Analyse housing-related commodity prices
An indicator lagging all others is the commodity price of lumber. When the price of lumber crashes — like in July 2018 — it usual coincides with a peak in house prices. This makes sense: if there’s a decrease in construction demand, prices have to fall to counteract the excess supply.
There may be temporary noise in the media, but the only real factor that affects the price of lumber is supply and demand
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Step 5: Predicting the future housing market
When analyzing the information gathered over the preceding steps we can come to the following conclusion: looking at the fundamentals, it’s pretty apparent there’s pain ahead for the housing market.
Prices are starting to peak, and we are witnessing a slowdown in growth similar to December 05'.
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Step 6: Speculate without owning physical assets
Real estate investment trusts are required by law to pay back 90% of their profits to shareholders. Therefore, REITs have some of the highest dividend payouts in the stock market ranging for 3–12%. If house prices don’t appreciate you still receive the annual dividend interest.
The REIT market is global: if you live in the U.S. but would like to invest in Singaporean real estate, you can simply log in to your brokerage account and buy or sell the stock in Singapore.
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