The 2008 financial crisis was unique because of its severity as well as the fact that distressed real estate assets and bad loans played a large role in precipitating it.
Before 2008, real estate had been one of the most stable, reliably performing asset classes. It was this history of reliable performance that led to investment banks betting too much money on real estate. When those bets came up snake-eyes, the banks — and by extension, the stock market — got bitten badly, and many of them never recovered.
Quantifying the effect real estate normally has on the entire stock market is not cut-and-dried. Financial markets and stock prices ebb and flow with the global economy, and market capitalization of the real estate industry plays a part. How does this secondary market impact institutional investors and does indirect investment in this sector impact real estate trends and stock prices?
How Does the Real Estate Market Shift?
The underlying fundamentals of the real estate market are subject to the same pressures as any other large consumer market — supply and demand. The real estate market has dramatic shifts when there is an imbalance between supply and demand.
In cases where there is an excessive amount of inventory for rent or for sale and low demand for that real estate, the market shifts dramatically downward and takes property values with it. In cases where the number of people looking to rent or buy exceeds the available inventory, the real estate market can heat up, which brings about a corresponding jump in real estate values.
As a general rule, the biggest driver of demand for real estate is jobs and hiring. Areas that have an active economy or a booming industry also have hot housing markets. San Francisco, and the entire Bay Area for that matter, is notorious for its white-hot real estate market. On the surface, you might look at this as completely logical because of the great weather, scenic vistas and great cuisine that make the area famous. Your retirement savings might not go as far, but it’s a dream location that pays dividends in life fully lived, enjoyment and excitement.
That’s certainly part of it, but the big thing heating up San Francisco’s market is the tech boom, which brought in workers from all over the world. Not only were the workers highly paid, there wasn’t enough housing to accommodate them all. This created a literal feeding frenzy that made San Francisco one of the hottest housing markets in the country.
A historical example of this trend that can also work in reverse just as rapidly. During the fracking boom, North Dakota had a huge influx of workers arriving to work in the oil industry. This influx of workers drove housing prices up several hundred percent almost overnight. Whether it was for sale or for rent, real estate in North Dakota cities that were close to fracking operations was hitting dollar-per-square-foot numbers that were previously unheard of. Builders responded and built apartments and housing as quickly as they could.
It was all going like gangbusters until OPEC increased oil production and the popularity of electric cars reduced global demand for oil. Once the price of oil dropped below $100 per barrel in 2021, fracking stopped being economically viable. It’s an expensive process, and if oil isn’t selling for $100 per barrel, it’s not worth it.
The kick-on effect of that was that a lot of fracking operations stopped, and workers went home. This transformation left an oversupply of housing because there were no longer enough oil workers to rent or buy the places on the market. Suddenly, real estate prices that had previously been skyrocketing out of control began to plummet with no bottom in sight.
The same factors that shift the market price up or down for any consumer good also affect real estate. As a general rule, areas with lots of hiring and an active job market have active real estate markets. The degree of the upshift depends on how much excess housing supply existed before the economy got hot and how many workers were hired. If housing was initially in low supply, the upshift could be dramatic and property values could double in a short time.
Can the Stock Market Impact Real Estate?
The short answer to that question is yes, the stock market can impact real estate. However, its impact on real estate is usually not as pronounced as it was in the crisis of 2008. The stock market crashed in 2008 along with real estate because so many investment banks were making heavy bets on mortgage-backed securities.
Prior to the crisis, real estate was one of the only sectors of the economy that was growing, which encouraged the banks and traders to gamble heavily on real estate. Not only did they buy up tons of mortgages, they began selling mortgage-backed securities to investors so they could raise money to buy more mortgages.
Investment banks all over Wall Street were affected, as was AIG, which was insuring a lot of the loans that had tremendous exposure to fluctuations in the housing market — specifically mortgage defaults. As a consequence, when people started defaulting on their mortgages, the real estate market went south. It took the stock market with it.
That’s not a normal description of the relationship between the stock market and real estate. This is not to say that there is no correlation between the two, but their fortunes are not necessarily tied to one another. Usually, the existence of a bull market means homeowners and investors have more money, which some of them put into real estate. When Wall Street experiences a bear market, there may be some slowdown in real estate, but the local job market usually has a much bigger impact on real estate prices than the stock market.
Are Certain Industries More Affected Than Others?
Certain industries whose performance is much more directly tied to the stock market than real estate can perform differently. Commodities such as gold and precious metals have long been looked at by investors as a safe place to put their money when the stock market goes south. The price of gold usually skyrockets whenever there is a downswing or a correction in the stock market.
Oil and gas is another industry that can be heavily affected by the stock market. If there is active futures trading on Wall Street, the price of oil per barrel (and gas at the pump) can spike almost overnight. The same goes for other commodities that are popular consumer products, including pork bellies (bacon) and cotton (clothing). Wall Street trading can have a huge impact on these industries.
Can You Use the Real Estate Market as an Indicator?
Although there is not always a direct connection between the real estate market and the stock market, you can still use the real estate market as a general indicator of the stock market’s performance. Imagine a hot real estate market where most homeowners have lots of equity. When this happens, homeowners tend to convert that equity into cash and invest in stocks. On the opposite side of the equation, if the real estate market is slow, homeowners may be less inclined to buy stocks, which could cool off the stock market.
Benzinga’s Best Real Estate Investments
Real estate is usually a great investment, but that doesn’t mean you have to be a home buyer or owner to invest in real estate. In fact, there are a lot of real estate investments you can make without directly owning property. You could buy into a real estate investment trust (REIT) or invest in a real estate crowdfunding platform. Benzinga is a great place to go for guidance, like this list of the best real estate investments:
What You Need to Know About Real Estate and the Stock Market
For as long as most people can remember, real estate and the stock market have been the two most popular asset classes for U.S. investors. This idea makes perfect sense because astute investors have used real estate and stocks as great wealth-building tools.
The drive to build wealth has led to some natural commingling between the two industries, but they are not codependent. Real estate can perform well independently of the stock market, and vice versa. In either case, if you’d like to learn more about investing in stocks or real estate, Benzinga is a great place to come for more information about doing both.
Frequently Asked Questions
Does the real estate market follow the stock market?
While there is some crossover between the performance of the stock market and the real estate market, the two do not necessarily follow each other in lockstep. A hot local real estate market can exist anywhere there is lots of hiring and a shortage of housing. When this happens, prices will be high and the real estate market will be strong regardless of how the stock market is performing.
If the stock market cools off, real estate values may suffer a slight dip because a slow stock market can dent consumer confidence. However, the kinds of large swings that characterize a stock market correction are uncommon in real estate. For example, a homeowner’s stock portfolio could crash 30% in a day, but it is very unlikely they would lose 30% of their home’s value as a result of the stock market cratering.
What affects real estate stocks?
Real estate stocks are subject to the same market pressures as any other industry, which means supply and demand play a big role in the value of real estate and, by extension, real estate stocks. Another factor that affects real estate stocks is interest rates. The prime rate, which is the interest rate the Federal Reserve charges private banks to borrow the money they lend to consumers, has a huge impact on consumer interest and mortgage rates.
The lower the prime rate is, the lower consumer interest rates will be and vice versa. If the prime rate is high, consumer interest rates will be high. The more expensive it is for people to borrow money, the less money they will borrow to buy real estate. This factor can cause a slowdown in home buying, which can create a significant drag on real estate stocks.
What is a REIT?
A REIT is a type of investment vehicle that allows individuals to invest in real estate properties and earn income from them. REITs are typically publicly traded companies that own, operate or finance income-generating real estate assets such as commercial properties, residential buildings or infrastructure projects. Investing in a REIT provides individuals with the opportunity to diversify their investment portfolio and receive regular dividends from the rental income generated by the properties held by the REIT.
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