Real Estate Trends Are a Key Indicator of Stock Market Performance - dummies

Real Estate Trends Are a Key Indicator of Stock Market Performance

By Paul Mladjenovic

Real estate is a key sector to watch in maintaining your stock investments because it’s a cyclical bellwether industry — one that has a great effect on many other industries that may be dependent on it.

Real estate is looked at as a key component of economic health because so many other industries — including building materials, mortgages, household appliances, and contract labor services — are tied to it. A booming real estate industry bodes well for much of the economy.

Housing starts are one way to measure real estate activity. This data is an important leading indicator of health in the industry. Housing starts indicate new construction, which means more business for related industries.

Keep an eye on the real estate industry for negative news that could be bearish for the economy and the stock market. Because real estate is purchased with mortgage money, investors and analysts watch the mortgage market for trouble signs such as rising delinquencies and foreclosures. These statistics serve as a warning for general economic weakness.

In recent years, the real estate mania hit its zenith during 2005–2006. A mania is typically the final (and craziest) part of a mature bull market.

In a mania, the prices of the assets experiencing the bull market (such as stock or real estate) skyrocket to extreme levels, which excites more and more investors to jump in, causing prices to rise even further. It gets to the point where seemingly everyone thinks that it’s easy to get rich by buying this particular asset, and almost no one notices that the market has become unsustainable.

After prices are exhausted and start to level off, investor excitement dies down, and then investors try to exit by selling their holdings to realize some profit. As more and more sell off their holdings, demand decreases while supply increases. The mania dissipates, and the bear market appears. This is what happened to real estate in 2007–2008, when the industry fell on hard times as the housing bubble popped.

The real estate industry first soared during 2000–2006 and then cratered during 2007–2012. Presently, the real estate industry is stabilizing after several very difficult years. Whether you’re a real estate investor or a stock investor looking at real estate–related companies and industries, it’s probably an appropriate time to see a slow return to normalization for the real estate world.

For real estate investors, start looking for companies that are showing consistent profits and taking advantage in a rebounding sector. Although the sector may not be out of the woods yet, the opportunities do outnumber the pitfalls. Stay tuned and do your homework (research) here.