Monday, January 24, 2011

Stock market vs. real estate

I have been perplexed, until I found the answer for, ‘Why the home prices did not get affected in the same manner as the stock market at the time of recession?

Recently, I have come across very convincing answers to this question and I would like to share the same with you folks.

Without going into the details of demand vs. supply, in short, if a product is surplus i.e. very low demand, then the price of the product should go down to reach the clearing point where the surplus goods will be gone. However, it so happens that the stock market quickly reacts to this theory compared to real estate, which is our original question. The reasons are that stock market is standardized and has high availability of information, as opposed to real estate. For example: One can get the financial statements of a company and see the performance, however one cannot have such intricate details for the real estate. The second reason is that there is more liquidity in the stock market, hence one can easily buy and sell stocks, whereas not in the case of the real estate. The other factor with real estate is that, people have an emotional attachment and bonding to the house they are in, which blocks them from buying\selling immediately. Hope this information helps!