Real Estate Investment Trusts
A Wild Ride So Far, But Is It Over?

REIT's have been super performers since 2003, and until only a couple of weeks ago, have been in an almost constant advance. One could almost say they have defied the old saying, "nothing goes up in a straight line forever."

However, over the past two weeks REITs have taken a plunge. Several emails from subscribers have asked, and rightly so, if we are near a sell signal. It seemed a good time to go over not only our REIT Timer strategy, but REITs themselves.

What Are REITs?

Real Estate cannot be described with one word. It can be your personal dwelling, rental properties, stores, strip malls, undeveloped land, or REITs and other investment securities.

For this commentary, we will look only at real estate from an investor's point of view. For the most part, they consist of REITs which are Real Estate Investment Trusts.

Most REITs derive income from rental income, such as apartment buildings, malls and shopping centers, and office buildings.

We have added a chart (below) of the Dow Jones Equity REIT Index (DJR.X) below. It is a weekly chart as our REIT Timing strategy is long term, and the weekly chart is what we look at here at FibTimer.

What Does The Chart Tell Us?

For the last three years, REITs have been extremely profitable. In fact, they have done well since 2000, with only 2002 being a losing year.

The above chart of REITs is very interesting. Almost like clockwork, they have had powerful advances lasting six months to a year, followed by extremely fast and deep sell offs. With the exception of 2002, the sell offs all were over within a few months, and almost all the damage was over in only a couple of "weeks."

Note that we have a bullish 5 Wave advance marked from 2002 through the end of 2004 in the above chart. In Elliott Wave theory, 5 Wave advances are usually followed by declines lasting 50% to 62% of the entire advance.

When we turned lower from the Wave 5 peak, we did expect a correction which would last a year or more, but instead, after the typical quick sell off, REITs powered right back to new highs.

Now we are looking at the third fast sell off in three years. What can we expect?

Negative Press

At this point we need to mention the all the bad publicity REITs are currently getting. TV financial analysts, commentators, writers, are all jumping on the band wagon to declare the Real Estate bubble has finally burst.

One thing to remember though. These very same "experts" said the same thing at every REIT correction. Like clockwork, the bad news was broadcast after REITs corrected. And like clockwork, REITs turned back to the upside and rallied to new highs. The commentators all just disappeared.

Is This Really The End?

This may very well be the beginning of the end, but so far, there's nothing unusual about this real estate correction.

Charts are not always right, but to ignore the evidence they give us is a foolish thing to do.

Sure, sometimes charts tell us one thing and "kerpow" the markets do something entirely different. But history is important, and REITs have a very "strong" history of long advances followed by fast and steep sell offs. They come out of the blue, everyone turns bearish, and then REITs turn right around and start advancing again.

REITs vs. The Housing Market

It is very important not to confuse REITs with the housing market. The demand for housing is absolutely tied to changes in interest rates. If rates continue to rise, which is a good bet, house prices are likely to suffer. Whether or not this becomes a housing "bust" remains to be seen, but if interest rates keep moving higher, certainly housing prices will be affected.

But we must remember, that even with the current rate increases, pushed ever higher by the Federal Reserve Board, real rates are still historically very low. It will take considerably higher rates, in our opinion, to really damage the housing market.

Now about REITs. Do higher interest rates affect the ability of Real Estate Investment Trusts to make a profit? Not really. Most REITs make their profits from rental income.

In fact, if housing is affected by higher rates, there could actually be more demand for rental properties and people find themselves priced out of the housing market. Where do they go to live? Apartment complexes, many owned by Real Estate Investment Trusts.

So What's Next?

FibTimer strategies are not based on interest rate changes, commentator's opinions or any of a hundred other indicators. FibTimer strategies are based on "price." Charts are created from "price."

The chart above tells us that we are in another of a regular series of sharp REIT sell offs. But it does not "yet" tell us that the REIT rally is over. Remember, the strategy is still up over 80% in the current trend "alone."

If REITs prices do continue to fall, obviously we will move to a defensive position. But for now, we are well within the normal range of a typical and repetitive REIT correction.

Do not get anxious when you hear the experts talk on TV. The experts have a vested interest in what they are saying. Most likely, they have bearish positions and would love to see the markets continue lower.

Don't see this correction in REITs as the end of the REIT rally. I could be, but right now, the evidence points to nothing more than a normal sharp correction.

Remember what we talked about above, most REITs are NOT affected by interest rates in the same way as the housing market. Once the "interest rate" panic subsides, clearer heads are very likely to see this as a huge buying opportunity.