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The Value of Technical Indicators

Posted on July 27th, 2010 by John Reeder

CRE Console took up the discussion on technical indicators on their blog yesterday which I loved.  I would love it if a CRE blogosphere develops to include discussion of real topics, rather than simply “Ten Tips for Hiring Me as Your Broker” type blog posts.  CRE Console obviously avoids those kind of posts and I try to do the same.

CRE Console makes some good points related to the utility of technical indicators.  Their primary point is that technical indicators are simply not “real time” in real estate, and therefore the shortcomings in data are going to limit the effectiveness of the indicators.  I’m somewhat receptive to this point, though there are some counterarguments that I could be persuaded by.

To start with it’s useful to note that CRE should never be seen as a short term investment.  Just the transaction costs alone require that you hold the asset for some time.  Given that it’s realistic that you’re going to hold each asset for multiple years, you’re necessarily looking for short term movements in price as the indicators that are going to influence your decision to buy/sell.  That’s why I used a four quarter trailing average on the graph that I put together.

In my mind, the real utility of technical indicators is the potential to help investors separate out the noise in the echo chamber from what is really happening in the market.  Most investors rely on the cyclical nature of the real estate market for their largest gains, and yet if most investors could figure out the swings in the market, there would be no real opportunity.  It is because investors have such a tough time getting away from the herd mentality that there is opportunity for the few that are able to figure it out.  Technical indicators could be developed to give investors a better chance of outperforming the market.

There will surely be a group of people who will say “What are you talking about?  Investors already analyze data to make their decisions.”  My only response to that is BS.  They don’t.  They analyze the data to reaffirm their emotional feelings about what they would like the market to do.  They analyze the data and then say “Yeah, but [insert excuse as to why they aren’t going to act on the data]”.

What I’m talking about is looking at a number of different indicators like price, vacancy rates, website traffic at the CRE portals, new product deliveries, etc.  I think that these data points should be analyzed as far back as you could get the data, empirically tested, and then used to create buy/sell alarms.  But these buy/sell alarms would at best get things right by a few months of the optimal time to buy/sell, not within days or hours as is the case with the stock market.

I’m not saying that these indicators would be all that you would use to make your buy/sell decisions.  I’m also not suggesting that someone go develop a quant real estate trading platform (trading REITs would be a better and more liquid platform if that was your interest).  But I am saying that because investors are emotional individuals ill-equipped to predict market swings, that technical indicators would put the investors who decide to use them much further ahead.

July 27th, 2010 | Category: Uncategorized

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