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THE DOW REPORT
Housing: What Do the Charts Say?

In my October 28, 2005 Wrap Up, I explained that the charts were showing us that the housing market was slowing. I want to begin by saying in that Wrap Up I had told you about having seen single family houses along the Alabama Gulf Coast, which is a major tourist destination on the Gulf Coast, double in the last year. Well, now I can report to you that I have seen price cuts in new medium to upper end homes of 20%. I am also seeing and hearing similar stories in other hot spots. Most recently, I read about price cuts just over 30% in Key West, FL. So, the charts were correct back in October in telling us that a slowdown was in the making. But I also posed the question, “Was this just a slow down or was it the top?” Today, I want to revisit these charts and evaluate where we are some 4 months later.

Below is a chart of the Dow Jones Home Construction Index. I have again marked the last three intermediate term cycle lows with a blue “I.” The first one you see on this chart occurred in March 2003, the second one occurred in May 2004, and the last one occurred April 2005. Notice that each one of these intermediate term lows occurred at a higher level than the preceding low. At present, we have what appears to be a failed rally, as is noted in blue. I say failed because the advance into the January high could not, or at least has not yet, bettered the July high. Now, if the current advance fails before the more recent January high is bettered, then we should look for the October 2005 low to be tested, and the likelihood then becomes that the April 2005 low will be violated. Cyclically, this index should have intermediate term lows coming in over the next couple of months. It is the decline into that low that will tell us if the recent slowdown has in fact been a temporary event or if the bubble is bursting. Violation of the April 2005 low will be the first time a previous intermediate term low has been violated since the Greenspan housing bubble began and will serve to confirm the housing market top.

Next, we have the Philadelphia Housing Index, and it too tells the same story as the Dow Jones Housing Index above. So, we could say that these two indexes are in gear so the speak.

Below is the Dow Jones Home Furnishings Index. This index appears to be leading the Housing market in that it topped out in March 2004. In spite of this fact, the 2004 as well as the 2005 intermediate term lows held above their previous low. But the decline out of the 2005 intermediate term cycle top violated the 2005 intermediate term low. Therefore, this set the stage for lower prices on a longer term scale. Since that violation, this index has rallied back up to retest the July 2005 intermediate term cycle top. If that top can be bettered, then this chart will be telling us that this index is back in a bullish mode. This should also be reflected in the Housing Indexes above. But here too we have intermediate term lows that are ideally due within the next couple of months. If this low holds above the 2005 low, then again, the housing market still has a chance. All the while, violation of the April 2005 low will only serve to confirm that yes, we have a top.

The bottom line is that we should be seeing the Housing Sector rolling over into intermediate term lows in the next couple of months. It is the decline into those lows that are ever so important for housing. Holding above the previous intermediate term lows will tell us that the recent weakness is only a temporary slowdown, while violation of those lows will serve to confirm that a much more significant top has been made.

Tim W. Wood

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