Moving Averages and Momentum Confirm Home Prices Are in an Uptrend

Friday, 26 Apr 2013 07:46 AM

By Michael Carr

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Stock market analysts often apply a variety of analytical tools to price action as they look for clues about what will happen next.

Moving average analysis is common in the stock market. A moving average uses the most recent data and discards older data. This smoothes the data and allows for analysis of the underlying trend. Traders often look at the 200-day moving average, for example, to determine the direction of the trend in a stock. If the price is above the average, they consider the stock to be in an uptrend, and a downtrend is confirmed when the price is below the average.

Applying this technique to home prices shows that housing has found a bottom and is a buy.

For stocks, the 200-day moving average is common. Applying a similar logic to home prices, we could apply a 10-month moving average to home prices, since 10 months is about 200 trading days. This moving average is now signaling a buy in the S&P/Case-Shiller 20-City Home Price Index.

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Just like with stocks, we can add other indicators to confirm the signal provided by the moving average.

Momentum, measured as the 12-month rate of change, is also bullish for home prices. Momentum is generally considered bullish when it is positive. It can be calculated a number of different ways, but they all tend to confirm each other. With long-term data, a 12-month or six-month rate of change is reasonable to use and both are positive for the housing market.

Markets can change direction suddenly, but standard technical analysis points to higher home prices. Buyers may rush into the market if they see prices holding up over the next several months, and that could fuel additional price gains.

These indicators don’t say we will return to the price levels seen in the bubble; however, they do say we have most likely seen the worst of the bear market.

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