While transaction volumes and several fundamental factors within real estate are pointing to continued moves higher, concerning chart patterns on some key assets within the sector are giving some active traders reason to tread carefully. Based on key fundamentals such as rising rental costs, major markets are in continued need of a robust workforce with rising wages to support growth.
In a December 2017 report, experts at Colliers International, a global real estate services company with 15,000 professionals operating in 68 countries, raised a red flag by suggesting that the sector may have peaked for the cycle. Due to the cyclical nature of this sector and the bearish chart patterns, which we will analyze in more detail below, active traders are likely to remain on the sidelines and wait for bullish signals to return. (For more, see: Real Estate Investing: A Guide.)
From a timing perspective, the Colliers report in December could not have come at a more interesting moment. Taking a look at the chart of the iShares U.S. Real Estate ETF, you can see that the release of the report in December corresponded with a drop below a key ascending trendline, which was also a clear level of support on each attempted pullback throughout 2017. The subsequent move below the 200-day moving average and failed attempt to regain its upward momentum confirmed to technical traders that the trend was in the process of reversing.
You'll notice that the throwback toward the newfound resistance of the 200-day moving average offered very strategic entry points for active traders, which was then confirmed again by the bearish crossover between the 50-day and 200-day moving average. Followers of technical analysis will tell you that the bearish crossover between the two long-term averages is known as the death cross and is usually a reliable signal that is used to mark the beginning of a downtrend. At this stage, traders will likely maintain a bearish outlook on the sector and watch for a rise toward the 50-day moving average, entering orders as close to the resistance level as possible to maximize the risk/reward. (For more on this topic, check out: Will Higher Interest Rates Crush Real Estate?)
Taking a look at the top holdings of the IYR ETF, it quickly becomes apparent that breakdowns of defined uptrends are appearing across the sector. On the chart of ProLogis, which is a global leader in logistics real estate and comprises 3.41% of the IYR fund, you can see that the price recently closed below the 200-day moving average. Just as the case shown above, the price of ProLogis is struggling to regain its position above the 200-day moving average, and the downward-sloping 50-day moving average looks positioned to break below the 200-day moving average, which would likely trigger another flood of sell orders. Until the price is able to move back above the identified support, it would not be surprising to see technical traders maintain a bearish outlook on the stock. (For more, see: Exploring Real Estate Investments: Characteristics of Real Estate Investments.)
Another component of the IYR ETF that could be worth a closer look based on its chart is Equinix. In case you are not familiar, the company owns real estate used in data centers, so it could be considered a riskier play than other types of commercial real estate. However, based on the chart pattern shown below, the price has recently fallen below its 200-day moving average and the long-term moving averages, so it appears as though even this segment of the real estate market is not immune to the sector-wide selling pressure. (For more, see: Exploring Real Estate Investments: Types of Real Estate.)
The Bottom Line
Recent moves below key support levels on many of the charts within the real estate sector suggest that prices could be headed lower over the weeks and months ahead. At this point, it looks as though the Colliers report from December suggesting that the peak for the cycle was in place could not have been released at a better time.