I ❤ Real Estate
I frequently tout real estate as an excellent investment for the following reasons: (1) it is a great inflation hedge; (2) there is an inventory shortage due to a lack of building, and not due to excess demand; (3) homebuying demographics are surging in sharp contrast to 2008; (4) buying is the only way to fix your housing payment; and (5) rates remain very low, despite recent increases, which can turn your mortgage into an asset if inflation continues to surge.
BUT – there are events that could put a damper on the real estate market – and one of those events is a major stock market correction.
The Buffet Indicator, named after Warren Buffet, is the ratio of total U.S. stock market valuation relative to GDP. Buffet called the ratio “the best single measure of where valuations stand at any given moment.”
Currently, the total stock market valuation is over 200% of GDP – an all-time record by a huge margin!
Prior to the dotcom crash of the early 2000s, the Indicator was just over 150%.
The “trend line” indicates that 120% of GDP is the healthy norm.
For actual numbers, the total value of the stock market is currently around $50 trillion, while the total annualized GDP is estimated to be about $24 trillion right now.
So, if it looks like a bubble, walks like a bubble, and quacks like a bubble, it’s a bubble. 😊 (I haven’t said that since at least yesterday).
Things are “not different this time” too… like we all heard over and over before the dotcom bubble popped.
It is not a matter “if” the market will “correct” but more of a matter of “when” and “how much.”
In my 2022 Predictions Blog, I mentioned that Barry Habib is predicting a 10% correction this year, largely as a result of the Fed’s efforts to push up interest rates.
But, other prognosticators are predicting much larger corrections, although they are not specific when it comes to timing.
Some of the doom and gloomers include billionaire investors Leon Cooperman, Stanley Druckenmiller, and Jeffrey Gundlach, as well as “Shark Tank” star Kevin O’Leary, the market prophet Gary Shilling, and the “Rich Dad Poor Dad” author Robert Kiyosaki.
Here is a Business Insider article that discusses their opinions.
I should note here that there are many more investors who do NOT think the stock market is overvalued.
In any case, I still think we are in for a significant correction within the next year or two.
Impact On Housing Market
And, having ridden out a few corrections in my time, I can predict a couple of impacts on the housing market:
- Buyers will sit on the sidelines as they lick their wounds, account for their losses and wait to see what happens.
- Rates will fall both because investors will move from stocks to bonds en masse (which always pushes rates down) and because the Fed will likely make an effort to reduce rates to bolster the markets and the economy – if the correction is deemed too large for comfort.
- Minimal effect on real estate values. I don’t see a stock market correction impacting values unless it is a result of real estate imbalance like we saw in 2008 – when inventory dwarfed the number of buyers. The dotcom crash, for example, did not impact real estate values at all, as this chart indicates.
So, yes, I am still very pro-real estate and yes, I try to keep my blogs as positive as possible.
But – I also do not want to hide from reality checks, and I never want to be too Pollyanna.
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