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Deflationary Mindset Hits Real Estate -- Again

"The willingness to 'wait' for lower prices is an aspect of deflationary psychology"

Signs of weakness are showing up in the U.S. housing market.

Let's set the stage right off the bat with a chart from the July 2018 Elliott Wave Theorist, which shows a correlation between real estate and stock market prices:

Real Estate Price Declines Usually Coincide with Stock Price Declines

As you can see, this reliable relationship goes all the way back to the early 1800s and persists to this day. When stocks fall, so do real estate prices, and vice versa.

Indeed, the all-time high in the DJIA registered on Jan. 26, 2018 (26,617), and here's what happened just two days before that, as Elliott Wave International's Chief Market Analyst Steve Hochberg and his colleague Pete Kendall explain in the monthly publication, the Elliott Wave Financial Forecast. This chart and commentary are from the August 2018 issue:

Leading the Charge Lower - S&P Supercomposite Homebuilding Index
The chart of the S&P Homebuilding Index shows that housing stocks made their countertrend rally high coincident with the Dow’s high. In recent weeks, however, they appear to be playing a similar role to that which occurred in 2005-2007: They’re leading the way lower. With a succession of lower lows and lower highs, the index is now below a ledge of support that had been created by its initial decline in January and February of this year.

Now, it appears a deflationary mindset is taking hold in some quarters of the U.S. housing market.

Let's return to the August Elliott Wave Financial Forecast:

What happened in the Hamptons on eastern Long Island in the second quarter highlights the imminent danger [of another real estate crisis]. Prices fell 5.1%, and sales were down 13%. More important, a new dynamic has emerged: “Would be homebuyers are holding off on purchases as they wait for sellers to bring down prices.”The willingness to “wait” for lower prices is an aspect of deflationary psychology.

A cautious psychology in and of itself tends to drive housing prices lower.

Take a look at these headlines from just the past month:

  • More Seattle-area home sellers lower list prices as market cools way down (The Seattle Times, Aug. 6)
  • Housing market is showing signs of cracking … (CNBC, July 26)
  • U.S. new home sales at eight-month low, housing slowing (Reuters, July 25)

Overall, housing demand has been sliding.

Even so, relatively few people expect deflation, which, ironically, makes it all the more likely.

The main reason that even most economists don't expect deflation is that it is rare.

Yes, the world did have a brush with deflationary forces during the 2007-2009 financial crisis. But, the last all-out deflationary period was 1929-1932.

In Elliott Wave International's view, people should start preparing for this rare event.

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