How Real Estate Affects The Stock Market

The relationship between real estate and the stock market is complex and multifaceted. Investors need to consider how developments in one market can influence the other, as both play significant roles in the broader economy. By understanding these interconnections and monitoring market trends, investors can make more informed decisions to navigate the dynamic landscape of real estate and stock market investments.

Let's find out how real estate affects the stock market in more detail.

How Does the Real Estate Market Shift?

The real estate market is dynamic and constantly shifting due to various factors that influence supply, demand, and pricing. One of the key drivers of market shifts is the economy. Economic indicators such as interest rates, job growth, and consumer confidence play a major role in determining the health of the real estate market.

For example, during periods of low interest rates and strong job growth, there is typically increased demand for real estate, leading to higher prices and a seller's market. Conversely, during economic downturns or rising interest rates, demand may decrease, leading to a buyer's market with lower prices and longer days on the market.

Market shifts also occur due to changes in demographics and lifestyle preferences. For instance, as millennials enter the housing market, there is a growing demand for smaller, more affordable homes in urban areas close to amenities. This shift in preferences has led to a resurgence of city living and the revitalization of urban neighborhoods. Additionally, changes in population growth, immigration patterns, and household formation can all impact the real estate market by creating new demand in certain regions or for specific types of housing.

Moreover, government policies and regulations can significantly impact the real estate market. For example, changes in tax laws, zoning regulations, or housing subsidies can influence property values and market dynamics. Developers and investors must stay informed about policy changes and market trends to make informed decisions about buying, selling, or investing in real estate.

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.

Frequently Asked Questions