Mark Hulbert’s recent column in MarketWatch proposes one possible reason why Real Estate ETFs are trading at 52-week highs, despite the fact that the headlines about real estate remain as dire as ever.
According to Cardiff and Horwitz, there are several good fundamental reasons for not dismissing the real-estate market out of hand.
A key one is the steady decline in foreclosure rates. They say that this is an early indication that the real-estate recovery is about to begin. Indeed, they point out, “in the late 1980s [in the wake of the S&L crisis], this was the best indicator for knowing when the recovery was near. As foreclosure rates dropped, the ensuing recovery began.”
According to these two advisers, foreclosure rates began to ease in last year’s fourth quarter. To be sure, that decline has been dismissed by many as being merely temporary, caused by various banks’ freezes on foreclosure actions and massive delays in the processing of foreclosures.
But Cardiff and Horwitz detect at least one straw in the wind that suggests the declining foreclosure rate might be more enduring.
This straw is the falling number of new default filings. Since a foreclosure has to begin with a default filing, such a decline must eventually translate into a more lasting drop in the number of foreclosures.
Compared to around 100,000 new default filings that were recorded each month in the spring and summer of 2010, they dropped to less than half that level beginning last October and have remained that low each month since.
In light of this, Cardiff and Horwitz say that they “believe we are witnessing the beginning of the end of the entire crisis.”
This, then, may be what the recent 52-week highs among real-estate ETFs are reflecting. Though those highs may seem counterintuitive, given how awful the news headlines about real estate have been in recent months, it’s worth remembering that the stock market is forward looking. By the time we read about something in the newspapers, it has long since been reflected in stock prices. (emphasis added)
One of the primary reasons that relative strength models are so effective over time is because they do not wait for the newspaper headlines. Rather, relative strength models often move into new trends well before there are any widely-known reasons for being bullish on a given security.
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Source: StocksCharts.com, Time Magazine
Disclosure: Dorsey Wright currently has positions in IYR, ICF, and RWR.
