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The fortunes of the national housing market and Wall Street have had an inverse relationship over the past decade. When the tech boom was occurring at the end of the 1990’s, investment in housing was stagnant. Then the combination of 9/11, the ending of the internet boom and subsequent stock market created the recent surge in housing that lasted through 2005.

Sales of existing homes plunged 8 percent in September to the slowest annual pace in nearly a decade. The report did not bode well for the overall economy, and at first stocks dropped on the news.
But the data also bolstered hopes that the Federal Reserve would cut interest rates again when it meets next week, making it easier to borrow money. Just the possibility of a cut was enough to erase the morning’s declines and send the Dow Jones industrials to a flat close.
It is still far from certain what actions the Fed will take at its meeting on Tuesday and Wednesday. A resilient job market, a narrowing trade deficit and strong retail sales all point to an economy that is weathering the subprime mortgage crisis and may not need federal intervention.  via New York Times.

The stock market broke out of it’s slump in 2004 and has been tracking upward since, just as investors we running from the housing market and interest rates started to climb. Now Wall Street has been seeing historic highs as the housing market is in the depths of depression. Where will the investors go?

My bet, they will stay in the stock market till housing hits it’s bottom. Then, as interest rates and housing prices have declined, they will return to the housing market and stabilize the inventory. You have to remember that the overhang of inventory in the housing market was built for the investor class to trade, not for the demand in housing units to be lived in.

The investor class in the United States has grown tremendously over the past few decades. Instead of a small part of the population able to make investment bets, a large part of the population now has cash and assets that can be invested in their 401k’s and other saving plans. This money moves quickly and is not reliant on a few fat cats making big moves.

So when the trend is to get out of the stock market and into housing as everyone was saying in 2001, the masses did. Then conventional wisdom said to get out of real estate and back into stocks. The housing market slumped as Wall Street roared.

One of these days the word will go out, Wall Street is dangerous and housing is where the deals are. Then the tide will turn and the new investor class will buy up all the REO properties, pricing will go up pulling those on the edge in bad loans out of their troubles, and every real estate agent will be proclaiming their genius as homes will be selling like hotcakes.

Real estate is not just for living in now, it is part of the economic market for the American investor. That means we will see greater swings in valuation for both the homeowner and investor. We are just living in a new paradigm and yet to recognize it.

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