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How Are Commercial Real Estate Returns Related to Stock Returns?
Interest rates and the cost of labor have a direct relation to real estate prices. Both of these are an indicator of the level of economic activity and can have a positive or negative result on stock market prices. Stock prices can rise because of investment opportunities in the corporate sector, and this increase in prices can affect liquidity. This in turn has its own effect on interest rates which can directly affect home mortgages and therefore the real estate sector.
So, how do home sales affect the stock market? Cost of labor is directly related to job availability which in turn is a result of commercial activity. Increased commercial activity can mean higher profits and therefore higher stock prices. Such activity can also cause a shortage of labor and thus increased labor costs. This in turn has a direct relation to the cost of real estate and higher prices there could cause a slump in sales.
At the same time an increase in stock market activities can lead to higher equity in the hands of investors. When the investor does take advantage of higher stock prices and liquidates some of his holdings, he is likely to look to real estate to invest part of his profits. This is because traditionally real estate has always been considered a safe investment, which can give steady returns and is considered far less volatile than the stock market. So there could be situations when a constantly booming stock market can in turn fuel a boom in home sales with increased realty prices. It is a well known fact that a boom in the stock market has lead to people buying more expensive homes and thus increased ownership levels.
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Factors Affecting Home Sales and Stock Market Activity
One of the advantages that home sales have is that the investor can actually see and feel his asset in which he has invested. On the other hand, all stock market activity is virtual and quite often not even backed by paper. Thus a nervous investor may prefer to go into real estate when the stock market is volatile.
Economic factors work together to affect the home sales market and the stock market. There may not be a direct relation between stocks and real estate, but these economic factors of interest rates and labor rates affect both home sales and the stock market. These effects may change the value of equity and the cost of homes, though quite often there is a time lag during which this occurs.
Another factor that affects both home sales and stock markets is the volume of business, and unless this is substantial there is no effect on the economy and the factors that influence the market. A stock market boom can mean additional bonuses which in turn can lead to increased home sales though with a time lag.