The Housing Market And Stocks bad News For Both
(As the housing market continues to slow, many people are left wondering about how different sectors of the economy are going to be affected by the slump.)
As things look grimmer by the moment, a lot of concern is being raised about housing’s affect on the stock market.
This issue has many people extremely worried about how things are going to pan out on Wall Street.
A September 19, 2006 article by Peter Coy of msnbc.com, “Can Wall Street withstand weak housing?” looks into the possibilities of what could happen concerning this pressing issue.
It seems as if analysts and forecasters are pretty much split on their outlook about stocks and housing. These are two very unpredictable markets, making it very difficult to predict what is going to happen.
“If your nest egg is made of 2-by-4s and you're watching the real estate slowdown with a mixture of fear and nausea, then this article is for you. The question: If real estate tanks, will stocks follow? Or will the market ignore housing? Or maybe — just maybe — will a decline in housing trigger a rise in stocks? It's something you really ought to think about if you're trying to figure out where to put your money.”
Traditionally, a decline in housing is associated with a decline in stocks as well. So, many are preparing for the worst and expecting stocks to go down alongside home values and prices.
“Let's start with the main, bearish case. Making the rounds of investment advisers is a chart prepared by Merrill Lynch showing the Standard & Poor's 500 stock index overlaid on an index of homebuilding activity from the National Assn. of Home Builders. The chart shows that the S&P 500 goes up one year after the homebuilding index goes up, and goes down one year after the homebuilding index goes down. (The correlation is 0.8, which means it's pretty strong.) The scary part: The homebuilding index has plunged over the past year. If you believe that history repeats itself, the S&P 500 is about ready for a nosedive.”
The reason why the housing market is known to effect stocks is because it affects so many other sectors of our economy, such as jobs and construction. If the market is slow, many people loose their jobs just because there is no more work for them, and this affects the overall health of the economy.
Also, consumer spending is directly affected. “People spent more freely because they felt wealthier and because they turned their homes into piggy banks through home equity loans, cash-out refinancing, and other means. Take away jobs and consumer spending, and it's no wonder that many experts expect a housing slump to hurt stocks.”
Although many have an apprehensive attitude towards stocks, there are some that are trying to be more optimistic in their outlook.
“But not everyone is convinced that housing will crush stocks. Why? Some figure that the housing slump won't be severe or prolonged. Robert DiClemente of Citigroup argues that the adjustment to a slower rate of sales is well under way. He says that the issuance of building permits is actually 10 percent below the rate of new-home sales. This process ‘will clear the overhang of houses within the next six to nine months,’ DiClemente predicts in a recent research note. The headline on his report: ‘Down But Not Out.’”
Only time will tell what is really going to happen to both our housing markets and our stock markets. We will just have to wait and see, and of course, hope for the best.
