Wall St. gains from housing slump
Many worry the slowdown is hitting the economy, but investors pulling out of real estate are pumping cash into stocks.
NEW YORK (CNNMoney.com) -- While economists, investors and even Federal Reserve policymakers express concern that the slumping real estate market will hurt the economy, U.S. stocks may well be getting an unexpected lift from problems in the sector.
That's because a wide range of real estate experts agree that much of the current weakness in sales and home prices is due to investors pulling out of the sector. And some stock market experts say that the money being pulled out of homes is finding its way into stocks.
"You can't say the Dow is up 100 points today because everyone sold their second homes this weekend," said Art Hogan, chief market analyst at Jefferies & Co. "But while it's difficult to pinpoint the timing of the effect, I think you can say there's been a slow migration of money from real estate to cash and then to equities for the last year or so."
Anthony Chan, senior economist at JPMorgan Private Client Services, agreed that the shift has been an important support for the stock market in a year it's been hampered by energy price spikes, concern about Fed rate hikes and forecasts for an economic slowdown.
"We know new money is not going into real estate, since it looks more and more like that is dead money," said Chan. "I'm not sure the flow has been strong enough to cause an avalanche. But it's been enough to help the [stock] market hold its own." He estimated that from a quarter to about half the gains in the major stock indexes this year could be due to the housing market weakness.
How much money has flowed from real estate to stocks is impossible to say for certain, but even a conservative estimate would suggest it is in the range of hundreds of billions of dollars.
The latest annual survey by the National Association of Realtors found that 27.7 percent of all home buyers in 2005 were buying homes as an investment, rather than as a primary or even secondary residence for their own use.
That translates into 2.3 million new and existing homes purchased by investors in 2005, up 16 percent from 2004. And the median price they paid was $183,500, up 24 percent.
The median price is almost always less than the average price for real estate, but even multiplying the more modest median price by the number of homes bought shows investors spent at least $425.7 billion on homes in 2005.
That's $125 billion more than investors spent on homes in 2004. And many experts say that investors this year have pulled back to far below even their 2004 levels.
Of course, many of those investors were using mortgages to buy the homes, but not all. In fact the Realtors survey found that 24 percent of investor buyers said they didn't use a mortgage, and another 19 percent said they had used a mortgage, but that it was paid off.
In addition, the survey also found 12.2 percent of home purchases last year were of vacation or second homes. And while the Realtors' survey found that three-quarter of those who made such purchases cited the used of the home for vacations as a reason for the purchase, 34 percent also said they saw the vacation home purchase as a good investment opportunity. In fact 13 percent said they were buying the vacation home to provide rental income.
So if real estate is now seen as providing less attractive returns, it could also redirect money that had been going into vacation home purchases back into stocks or other forms of investment.
Investors pulling out of home market
There is widespread agreement among economists and home builders that investor buyers, after helping to feed the building boom of the last two years, are pulling out of the market.
Many are putting recently purchased new homes up for sale. While that is hitting home prices, it also is freeing up even more billions that those investors will look to deploy elsewhere.
"There is no way we've seen the worst of the housing market," said Chan. "All the attention to home price declines and slower sales, all of that can be very positive for the equities because it sends a signal that stocks are attractive, relative to the housing market."
The nation's leading home builders, including Pulte Homes (Charts), KB Home (Charts), Lennar (Charts) Hovnanian Enterprises (Charts), Toll Brothers (Charts), and Centex (Charts), have all seen their earnings and new orders plunge.
Lennar warned Tuesday that the home building market has not hit bottom yet. And executives at most of those builders have cited a pull-out of investor buyers from the real estate market for the downturn in real estate.
Chan and Hogan said the reverse of this trend was seen in 2000 and 2001, after the bursting of the stock market bubble.
With investors at that time nervous about stocks, many found a new home for their investment dollars in real estate, helped by the low mortgage rates and the relative safety of what was perceived as ever-rising housing prices. That in turn helped feed the strong boom in home prices and sales levels since.
One difference between the 2000 stock market collapse and now is that after the stock bubble burst, many investors were left with significantly less money to invest. Even with the Realtors reporting the first year-over-year drop in existing home prices in more than 11 years in August, housing prices have not plunged yet in most markets. So investors who are able to pull out are taking more money with them than they might have after a drop in stock, bond or commodity investments.
Still, not all investor home buyers are going to pull out of the market. The Realtors survey found that 70 percent believed real estate was a better investment than stocks. But 14 percent said real estate is about as good as stocks, and 4 percent said that stocks were a better investment.
One other way the weakness in housing may be supporting stocks? Chan noted that it helped convince Ben Bernanke and his fellow Fed policymakers to end their string of rate hikes this summer after raising rates for two years in a bid to cool economic growth and ward off inflation.
Lower rates tend to boost the economy, lifting corporate profits, and thus stock prices. But that's a less direct effect, and the end of rate hikes hasn't always been good for stocks.