The real estate market has never been in better shape – and neither have the stock exchanges. This has led commentators, including veteran Jeff Greene for CNBC, to suggest that the current state of the joined-at-the-hip markets is a bubble. The real estate-stock market connection is an incredibly complex one, extending past simple real estate and into insurance, construction, and further on. Understanding that link gives any would-be investor or analyst the opportunity to decide whether they think the current trend is sustainable.
Any homeowner will be aware of the advantages of owning their home. A big part of this comes with the material side – upgrading your house, improving your borrowing power, building equity, and enjoying certain tax exemptions. All of these factors pay into the stock market, and as MarketWatch outlines, investors looking to capitalize on a housing boom have a huge range of options. While home building is one avenue to go down, stocks impacted by the housing market include DIY and home improvements areas such as Home Depot, food retail like Walmart, and the swathe of insurers that are listed on the stock exchanges.
Where the bubbles form
The most famous stock market bubble of all, centered around the 2007 financial crisis, was famously linked to real estate. Subprime lending was dressed up at a better quality than it really was, and this led to a bubble and inevitable pop as homeowners started to default. A hint as to whether the current situation is a bubble or not can be found by looking at tertiary stocks. Reuters highlights the soaring cost of lumber as indicative of what may be a bubble. The impact of 2020’s lockdowns pushed many lumber mills into closing their doors – the anticipation was that demand would reduce significantly. Of note is the fact that, for once, housing stock is below demand – there aren’t enough house purchases compared to interest.
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Bubble and crash?
The current real estate market is red-hot. This means that, slowly but surely, mortgage rates are going to creep up, despite low-interest rates. MSN Money highlights one key factor that should cool the market and prevent it from crashing and burning – and how this will protect the stock market. Mortgage underwriting is far more strict than it has been in real estate crises of the past, and that means that insurers and derivative traders are unlikely to feel the bite of the housing crash quite as acutely. Any crash may well be within the bounds of the real estate industry itself, rather than where it is connected at the hip to the stock market.
That being said, the stock market is definitely very reliant on real estate. This situation may be better at present, but there is always a risk that the real estate market will feed into the stock market. Investors and homebuyers alike should be vigilant to the risks and manage their portfolios accordingly.