Friday, 16 January 2009

Stock Price versus Housing Price

"However, bad news keeps coming day after day. If and when massive layoffs start translating into lost jobs, even tougher action will be needed. At least on the basis of stock market prices, investors do not yet see any brighter prospects on the horizon." , Matti Vanhanen, Finnish Prime Minister, 15 January 2009.

One difference about Stocks and Housing, one could say, is that the Stock market is mainly priced by investors. Investors always try to figure out the outlook in term of profit and economical environment, in order to make sound and stable profit.

As of today, the stock market has been correcting by more than 50%. It has and is clearly indicated that the general economical situation has deteriorated.

On the contrary, the housing market is a market that is mainly priced by households and few speculators. Households tend to have a lagging view on the economy. They only react after the event or long after. The core issue could be due to information asymmetry. The only source of information that people tend to get are from the media that tend to react or distort informations and usually do not lead it.

Household, as well, tend to live in continuity, extrapolating the future based on very near past. "If the economy is booming today, it will tomorrow", that's the kind of attitude that push people to take unwise decision in term of investment i.e investing in housing in the worst moment and avoid it during the best time.

When the stock market recovers, the economy will follow suit in general with a lag of 6-18 months. The housing market tend to have a psychological component in it and its recovery will lag many years even after the economy start to pick up.

One thing is sure, if you are an investor, the first opportunity will be in stock market then in housing unless we are in a Japanese type deflation where none are good, that is to say, a situation where the monetary policy fall into the "liquidity trap" :

"A liquidity trap is a situation in monetary economics in which a country's nominal interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy", Wikipedia

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