Stock Market direction? Real estate has clues

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Speculators will find real estate a highly profitable field of study for understanding stock market cycles.  According to a widely respected economic theory first put forward by Henry George and David Ricardo in the nineteenth century, business cycles are caused mainly by movements in real estate value.  If you are trading off stock picks, share tips or stock tips, this is worth bearing in mind. 

George and Ricardo began with the observation that rents and land prices rise when business conditions are good.  Eventually, rent-seeking landlords absorb all the excess profits that businesses make. 

 

Businesses fall behind on rents and mortgage payments; defaults begin, and bankers call in loans.  Land prices begin declining because fewer tenants can be found to lease property at current prices.  As these developments reduce lending for other business activities, general business conditions worsen. CVXJK6S75MSP

Just at this most inauspicious time, an abundance of new development comes on the market.  Developers had broken ground on new projects back when business conditions were good, acting on the assumption that property prices would continue rising.  When the development of the projects is complete, there are few takers, and certainly not at the prices anticipated when the development began. 

The net result is that rents and land values are driven down still further.  Similar patterns are observed in many other areas, such as venture capital and agriculture.  In the real estate cycle, prices eventually fall to a level low enough to permit entrepreneurs to start profitable businesses on these properties once again.  Expansion of these new businesses spurs real estate prices higher, and the cycle is ready to repeat.

While this simplified model sounds almost too simple and too obvious, George and Ricardo demonstrated that throughout history and across countries the cycle seems to repeat over and over again. 

The conventional wisdom was that gains in stocks drive up real estate prices because people have more money to invest, but it has not always worked this way.  In their book Practical Speculation, Niederhoffer and Kenner demonstrated an amazingly large correlation between changes in Real Estate Investment Trust (REIT) prices in one quarter and the S&P change in the next quarter and that for long periods REIT prices led stock market prices. 

We are not aware of any stock picking or stock tips service that uses real estate as the basis on which new share picks or share tips are given, but would be interested in hearing from you if you are aware of any.

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