Head and Shoulder Pattern in Denver Real Estate

As readers of my blog know I am somewhat a statistician as I look at various statistical measurements including the well respected Case-Shiller index concerning housing costs. Please note statistics are similar to an appraisal; they are a look back and not necessarily a look forward. I also believe history repeats itself as I have been a broker for 20+ years and have watched with interest the effects of business cycles on our real estate market.

Please note I am not advocating the following analysis concerning a Head and Shoulders pattern adopted from the stock market HOWEVER housing prices in general trend with the stock market. Thus reviewing the latest statistics and graph patterns I noticed a head and shoulders pattern-taking place in the Denver (and other) housing markets: The following is a graphic of a Head And Shoulders Bottom as related to equities:

H_and_s_bottom_new

Per Wikipedia: This formation (Head & Shoulders Bottom) is simply the inverse of a Head and Shoulders Top and often indicates a change in the trend and the sentiment. The formation is upside down in which volume pattern is different from a Head and Shoulder Top. Prices move up from first low with increase volume up to a level to complete the left shoulder formation and then falls down to a new low. It follows by a recovery move that is marked by somewhat more volume than seen before to complete the head formation. A corrective reaction on low volume occurs to start formation of the right shoulder and then a sharp move up that must be on quite heavy volume breaks though the neckline.

Another difference between the Head and Shoulders Top and Bottom is that the Top Formations are completed in a few weeks, whereas a Major Bottom (Left, right shoulder or the head) usually takes a longer, and as observed, may prolong for a period of several months or sometimes more than a year.

Screen Shot 2017-08-11 at 8.41.30 AM

In May 2017 according to the Case Shiller index the average home price in Denver reached $456,100 which is 41%+ higher than the previous peak experienced in Denver in August 2006 which many will remember was the pinnacle before descent into the Great Recession.

While the graph is not the easiest to comprehend yet the visual is strikingly similar to the Head and Shoulders Bottom, the following is the pricing and trend over a 17-year period, which I have mentioned in previous blog posts including the pricing history and activity of a home in Country Club.

  • 17 years: Average Annual Increase: 5.8%
  • 10 Years: Average Annual Increase: 4.6%
  • 3 Years Average Annual Increase: 10%
  • 1 Year Average Annual Increase: 7.9%

The average cost of a home in Denver throughout the past 17 years:

  • 2000: $230,000
  • 2007: $313,500
  • 2010: $290,000
  • 2014: $350,900
  • 2016: $422,800
  • 2017: $456,100

Are times and trends different from the Great Recession at present? Yes. Lending standards have tightened, sub-prime lending seems to be under control and we continue to be in a Goldilocks Interest Rate environment.

However just on a business cycle trend I have some concern and this does not include outside influences i.e. saber rattling concerning North Korea which impacted the equity markets worldwide yesterday with the largest point downtown since May 17th, 2017.

I am not a market forecaster however based on the statistics and graphs presented in this blog my level of concern for a retrenchment in prices is ratcheting upward. We are witnessing price adjustments in the upper-end of the market and if interest rates were to increase we would see affordability challenged further and average prices go down. Not necessity a negative as we continue to be in a seller’s market and average buyers are challenged concerning affordability and inventory, not a positive long-term trend for our housing market. I am not making any predictions, just showing statistics and voicing some concern.

 

 

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