Dust beginning to settle on the residential real estate market

The power of fifth-wave thrusts following an Elliott Wave triangle has proven itself in many markets, including the parabolic rise - and consequential drop - of home prices in the U.S. Actually I don't think this was limited to homes only in the U.S., as the effects were felt also in the United Kingdom, parts of Europe and other areas of the world. A range-bound market often (although not always) encompasses an Elliott Wave triangle which tends to compress prices into lower highs and higher lows. Eventually price seems to explode out of the triangle - creating what looks like a "J-curve" parabola or bubble peak. When this happens in tradable markets it creates a "buy the dip" mentality that works until the bubble breaks. That even happened in real estate when speculators of all sorts crowded in - from condo flippers, to the more common renovators, to folks buying second and third homes; and let's not forget the new home builders who piled on too. Below is a chart illustrating the triangle and 5th-wave thrust that bubbled up and broke, courtesy of ChartoftheDay.com:

Chart of the Day
For some perspective into the all-important US real estate market, today's chart illustrates the US median price of a single-family home over the past 39 years. Not only did housing prices increase at a rapid rate from 1991 to 2005, the rate at which housing prices increased – increased. That brings us to today's chart which illustrates how housing prices have dropped 33% from the 2005 peak. In fact, a home buyer who bought the median priced single-family home at the 1979 peak has actually seen that home lose value (1.6% loss). Not an impressive performance considering that nearly three decades have passed. It is worth noting that the median priced home has moved back to the top of a trading range that existed from the late 1970s into the mid-1990s.


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First, a quick reminder - they state that: "In fact, a home buyer who bought the median priced single-family home at the 1979 peak has actually seen that home lose value (1.6% loss)." But don't forget that they charted this in inflation-adjusted prices. The dollar's value has depreciated greatly since the 1970's, as we know from looking at references like gold. So existing homeowners can have some comfort that their home price since the 1970's did provide some inflation hedge. In other words, a home bought in 1979 has held its value relatively better than cash.

What's next? Price has already corrected back to the area of the triangle - the range shown on the chart. Will home prices find support, and start moving up smartly again? It very much depends on whether the decline finished measuring out five waves of its own. The chart above suggests that it may have a fourth-wave consolidation or correction/pullback upward that needs to complete before it drops into its own final low, which may be only slightly lower than the current level. Given the pace at which the real estate market moves, that may take a number of months. After prices complete their own 5th-wave low, there can be another rally. But it very much depends on just where this entire pattern fits into the much, much larger picture. For example, the stock market drop of 1987 from a small fifth-wave peak ended up looking like simply a wave 2 in a much bigger uptrend. These days, however, it's difficult to predict that a much bigger uptrend awaits anytime in the near future. The dangers are that home prices may be range-bound for many years ahead; or worse, that any further rally may be followed by a drop lower still, such as toward the bottom of that chart.

Remember, once again, this is based on an inflation-adjusted charting of home prices. If the dollar goes into hyper-inflation, then the apparent price of homes and a lot of other investments, including gold and other commodities, will seem to rise nicely again. But it's difficult to recommend buying a home for its investment value. For most people, it will just be comforting that the rate of decrease slows down and home prices seem to stabilize for a while.