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Will Tax Bill Produce a Real Estate Debacle, or is a Boom Ahead?



This article is published in collaboration with Scutify, where you can find real-time markets and stock commentary from Robert Marcin, Cody Willard and others. Download the Scutify iOS App, the Scutify Android App or visit

Lately at Dohmen Capital, we are seeing how the Real Estate market now is somewhat reminiscent of the environment leading up to the Great Financial Crisis of 2008. However, we must keep in mind that there was a roughly two year lead time between the first signals of excesses and the crash of 2008.

Between 2008- 2009, many investors were burned, with the estimated losses equaling over 20 trillion U.S dollars. Due to the devastating losses, countless investors have been fearful of getting back into Real Estate. This created new opportunities for savvy investors but also heightened risk for uninformed investors who still hang on to the false belief that real estate prices only go up over the long-term.

A popular and underused leading indicator for the Real Estate market is the housing starts index, which measures the number of new homes that developers are building. This number tends to precede future sales volume and housing prices.

Developers follow Real Estate trends and try to only build when the market is becoming stronger. Because of the long lead times, they often build the most at a top. They are often the victims of the same bad emotions as other investors that become the most enthusiastic at market tops. If developers can get the financing, they will build.

As you can see in the chart below, developers are currently beginning to produce fewer homes. Many analysts think that the developers know something we don't, and therefore are looking for another Real Estate recession. However, our work shows that just like corporate CEOs who make a big acquisitions right at market tops, the developers make the same mistakes. In other words, when they're cautious, it is bullish for the housing market.

If our observations still hold, it would be a bullish argument that could lead to excellent investment gains for smart real estate investors, at least over the intermediate term.

While housing starts generally precede Real Estate prices, there are also often "transitory" slowdowns that occur just before a strong boom. This actually occurred in 2004 as we will later explore.

In the chart, the bears would point out how the weakness in the Housing Starts Index trend over the past year (red line) is similar to that seen before the 2008 plunge (blue line).

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This article was written by Dohmen Capital for on .

This article published in collaboration with Scutify, the best app for traders and investors. Download the Scutify iOS App, the Scutify Android App or visit

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