Banking on a Bottom in Existing Home Sales

One of the biggest mistakes people make when analyzing markets and the economy is looking at the last credit cycle to predict what will trigger the next "crisis" and end the current cycle. But there's an even worse approach; referencing not just the last credit cycle, but going back two cycles because you were already wrong about the previous one. Doing this signals to everyone that you don’t fully understand the current situation.

It's like saying that a savings and loan crisis would have caused the 2000 market crash, or that a tech bubble was going to be responsible for the 2008 crash, or that a housing market crash would trigger the 2020 downturn. These arguments are always a decade behind and completely out of touch with current conditions.

This brings us to the present-day "housing bears." These are the people who have been wrong since 2013 with predictions of another imminent housing price crash. Instead, the housing market soared throughout the 2010s, even though these same people claimed in 2017 that not even a major event, like three major hurricanes to hit Florida, could save housing. Now, more than a decade later, they are still pushing the same narrative, despite being proven wrong multiple times.

The reality is that whatever causes a major financial crisis during one credit cycle rarely repeats in the next. Why? Because these crises take years, sometimes decades, to build up. Over time, regulations become less effective, and markets get more efficient, until something snaps. Once a crisis occurs, new regulations get introduced to prevent the same thing from happening again, at least in our lifetime. (A perfect example is the overhaul of the credit and housing markets after the 2008 crash.)

One of the many things these critics fail to understand is that housing prices and housing activity are not the same thing. Even when housing activity slows down, home prices rarely fall. For instance, the housing sector, excluding home builders, has been in a deep recession since early 2022. Existing home sales are now at levels we saw during the peak of the pandemic lockdowns, yet home prices haven’t dropped the way many predicted. On the contrary, home prices are already putting in new highs after cooling off from the insanity caused by the extreme lows in mortgage rates and available inventory.

Now that mortgage rates are trending down and existing home sales have dropped to extremely low levels, I believe the housing market is stabilizing and nearing its Recovery phase. It seems the stock markets are signaling the same thing.

If that’s true, here are some ways you can take advantage of the resurgence of existing home sales in the near future.

Stage Analysis

There are countless ways to trade and invest, but one of my favorite strategies for longer-term positions is Stage Analysis. This approach was popularized by Stan Weinstein in his classic book, Secrets for Profiting in Bull and Bear Markets.

Stage Analysis is perfect for those who want to stay involved in the market as somewhat active participants, but don’t have the time or desire to spend hours in front of a screen.

The way to implement this strategy is by buying the breakouts and/or tests of the breakout level, and then riding the trend until price begins to stabilize below the 30-week EMA (Exponential Moving Average).

Mortgage Origination

Rocket Companies (RKT)

Before most people can purchase a home, they first need to get approved for a mortgage. Combine that along with the surge in mortgage refinances over the past several months, and it’s no surprise that mortgage origination companies have already broken out of Stage 1.

Now, prices are retesting prior resistance levels for support, offering a good entry point for investors. The first target is around $27. If the price holds and consolidates at that level, the all-time high of $43 is in the cards.

Brokerages

Zillow (Z): Currently testing it’s Stage 1 breakout level.

Redfin (RDFN): Currently testing it’s Stage 1 breakout level.

Personally, I like all three of these plays as long as they continue to show strength above the 30-week EMA (purple line). Especially Z and RDFN as they are testing their breakout levels now.

Sometimes it really is that simple. We will see if that remains to be true for this play on a possible resurgence of existing home sales.

Take 100% Responsibility for the Result

If you decide to take this trade under these parameters, that decision is 100% yours and yours alone. If you are the type of person to blame others for your choices, then trading/investing is not for you.

With that being said, if you have any questions now or along the way, do not hesitate to ask me privately or publicly. I will offer any insights that I have.

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