Oil and Real Estate
There are some real differences between the workings of the stock market and those of real estate. At its core the housing market, like the stock market, is all about supply and demand. However, the difference is that stocks and bonds investors base their decisions to buy into stocks on future potential, whereas real estate investors base their decisions to buy into housing on inherent value. Thus, the type and quality of demand exercised buy a stock purchaser is very much different from the type and quality of demand of a real estate buyer. Because stock investors characteristically place their bets on future potential, Wall Street is an excellent – the best, in fact – gauge of things to come, a thermometer of the future. Wall Street, these days, seems to be saying that the future holds unpleasant surprises. When the economy as a whole is put under the double pressure of increasing interest rates and increasing oil prices, the escape of capital towards the payment of interests and the purchase of oil and related products is to be felt on general demand for goods and services, which include both the stock market and real estate. Wall Street is invariably more sensitive to economic imbalances and their repercussions, because stock trading is a faster market than real estate, by far. Supply threats in major oil producing nations like Iran, Nigeria and Iraq have pushed US oil futures to USD $69 per bbl., within striking distance of the all-time high USD $70.85 per bbl. hit last August, after Hurricane Katrina leveled U.S. oil platforms and refineries. Iran is at odds with the West over its atomic program, rebels have knocked out nearly a quarter of Nigeria's output and Iraq's exports are at their lowest since the U.S.-led invasion. Moreover, continued growth and strong demand for oil in the United States and China - the world's two largest energy consumers - is also adding to concerns that the oil industry may struggle to match voracious consumption, thus pushing crude prices even higher. As oil becomes scarcer and more expensive, there is a high probability that the economic shock waves will hit hard throughout the economy. Petroleum is a basic raw material used in the manufacturing of many products including chemicals, paints, plastics and synthetic textiles. Other industries - steel, aluminum, power generating plants - use large quantities of oil and oil derivatives in the course of their production. When petroleum supplies become pinched and prices push up, these industries may well be forced to restrict output and raise prices, thus putting even more inflationary pressure on the economy. These, in turn, may force central banks to adjust their monetary policies by raising interest rates higher and, what’s worse, faster, thus not giving enough time to the economy to adjust. Scarcely any enterprise is immune to the oil squeeze, as the lessons of the ‘70’s and the ‘80’s have taught, and real estate is definitely no exception. Obviously, it is hard for stocks to take off with oil going straight up to the US $70 a barrel, or when the Fed keeps saying interest rates are going to go higher. And every day, people putting more money towards maintenance of their debts and towards the purchase of ever expensive consumers goods means less people putting money into stocks and bonds or, for that matter, real capital assets. Besides, as interest rates increase, mortgage funds erogated by lenders dwindle, because they too become more expensive and out of reach or, otherwise, unaffordable. The real estate industry has been booming as housing prices have soared. But if interest rates continue to rise, new borrowing against home equity will drop, and may disappear. If all that borrowing - which freed up cash that was spent on new furniture, appliances, vacations, cars and the like - simply vanished, the effect could be large enough all by itself to send the economy into recession. At stake there is what we economists refer to as “The Wealth Effect”. Consumers tend to spend more when their net worth increases, and less when it decreases. When people feel rich, they spend - a psychological effect known in Economics as "The Wealth Effect". It doesn't matter whether their wealth is actual or merely on paper, whether the money they spend is their own or borrowed on the equity of their assets. Economists use this rule of thumb: a $1 change in household wealth leads to a roughly 5-cent change in consumer spending. Consumers have felt rich – very rich – these past few years. So rich, in fact, that real estate purchasers, for example, have lined up to buy properties always more and more overpriced. Why did they do it? Afterall, everybody knew that the market was overpriced, that it was ‘hot’, that it was a Sellers’ market. I can personally attest to the fact that several times last year, when I took people out shopping for houses and apartments, it was very common to hear comments the likes of “Oh my God!” or “That’s too much!” or “It’s not worth it!” And yet, the same people who were making those remarks ultimately ended up buying – at Sellers’ prices, in fact, if not more. So, again, why did they do it? The answer is to be found in the ratio of the perceived value of a capital asset vis-a-vis its intrinsic risk of acquisition, the so called ‘worth’. Clearly the lower the risk, the higher the perceived value and its worth. It follows, therefore, that the perceived value – or simply ‘value’ - of a real capital asset is the total monetary worth obtained by reducing exposure to risk and liability. Put in elementary terms, ‘value’ is the total net benefit a buyer expects to receive from a purchase, measured in currency. And in times of expansion, like the ones we have seen in real estate, risk was perceived as minimized because of the appreciation of property values, coupled by the relatively low cost of borrowing. Now that the tide is changing direction, sellers must apply leverage on the perceived value of the interest in land they are offering in order to motivate buyers, and there is no better way to accomplish that than by lowering prices. It all boils down to prove, therefore, that oil is so important for real estate, that the impact of an energy crunch may be felt and engulf the entire industry in addition, of course to spread to the entire economy. In fact, it may affect our very own way of living. Luigi Frascati Luigi Frascati is a Real Estate Agent based in Vancouver, British Columbia. He holds a Bachelor Degree in Economics and maintains a weblog entitled the Real Estate Chronicle at http://wwwrealestatechronicle.blogspot.com where you can find the full collection of his articles. Luigi is associated with the Sutton Group, the largest real estate organization in Canada, and is based with Sutton-Centre Realty in Burnaby, BC. Luigi is very proud to be an EzineArticles Platinum Expert Author. Your rating at the footer of this Article is very much appreciated. Thank you. |
Other Trading Tips Articles
Toenail Fungus: Tips For Treatment The medical term for toenail fungus is "onychomycosis," pronounced on * EE * ko * my * ko * sis. Despite the commonly used term "fungal toenails", onychomycosis describes both fungus and yeast infections in the nail. The prevalence in America is about 2-3%, but some have reported it as high as 13%. Even at a low estimate of 2%, this accounts for ...Search Engine Optimization (SEO) – An Overview Run a search on any of the 200 major search engines, and the results will come up in similar orders on quite a few of them. How a website owner/operator gets their website to the top of a list is called Search Engine Optimization, or SEO. Optimizing a website involves many of the same techniques, whether the aim is to optimize for Google adwor ...Summer Safety:Stay Cool and Stay SAFE There’s no mistaking it – summer is in full swing in California. Temperatures have peaked the past few weeks, leaving residents to seek shelter indoors from the blazing sun. So how can you “beat the heat” and still enjoy all the splendors of summer? Here are some things to think about:STAYING COOL:Staying cool and preventing dehy ...7 Stock Market Tips You Can't Live Without Every day there are a dozen new HOT stock market tips that guarantee your financial success. Every day there are hundreds if not thousands of people that jump on the bandwagon, and every day, each of those people are disappointed.When it comes to popular stock market tips, there is no golden ticket to striking it rich. So I'm going to sho ...Finding Hidden Profits In Your Business - 7 Strategies To Use Today If I walked into your business and spent an afternoon, I'm fairly confident I could find several little hidden profit centers, just waiting to be used. Let's talk about 7 strategies for finding hidden gold in your business.Strategy #1 Let someone else do the mopping and filingWhen you "save money" by doing $8/hour work ...Investor or Trader... Which Are You? Most market participants consider themselves to be "investors." But if you look at a list of the really big winners on Wall Street, you will see that most of those who make big profits, list themselves as "traders."By "big profits" we mean doing better than the S&P 500 Index or Nasdaq 100 Index by a substantial margin over any three year ...Deciding Between Long-Term and Short-Term Investments In an age when investments are more easily accessible by everyone, it can be difficult to decide what type of investment is best for your needs. Should you invest primarily in short-term investments that will yield results quickly, or would it be better to invest in long-term investments that will yield results farther down the road?Each ...What is Index Trading? Almost everyone has heard about index trading but fewer than 5% of personal traders actually do it. One of the most heavily traded indexes is our very own S&P 500 and it trades hundreds of thousands of contracts every day.As you know every stock fits somehow into a sector. For instance DELL is in the overall tech sector, WorldCom is in t ...Screenwriting Competition: Lord of War (2005) Deconstructed From our deconstruction of hundreds of Hollywood blockbusters....The Hero's Journey is the template upon which the vast majority of successful stories and Hollywood blockbusters are based upon. In fact, ALL of the Hollywood movies we have deconstructed are based on this template.Understanding this template is a priority for stor ...Your Talents For a Free Cruise It’s true! You can trade your talents for free (or substantially discounted) luxury cruises. Cruise line management is very interested in keeping their passengers happy at all times. This goal is a bit more challenging on days when the ship’s at sea. To address this issue the cruise lines offer all manner of onboard activity. Many o ...Energies Seasonal Trends – How To Trade Them For Huge Profits! If you want big profits you need volatile trending markets and energy markets are just such a market.Seasonal trends allow traders to better isolate high return, low risk trades and are easy to use and take advantage of and can increase your profit potential dramatically.They are perfect for all traders, even those who have never t ...Caribbean Single Market and Economy - Who Says UWI isn't Doing Enough? The University of the West Indies (UWI) has often been viewed as a long-standing partner to Caribbean Governments in fostering integration and development of our people, and forming strategic alliances.CARICOM member states are now considering the establishment of a single market economy. This will mean the general removal of all legal an ...How to Achieve Currency Trading Success: Part 1 Currency trading success can be achieved by anyone, as everything about trading currencies can be specifically learned, by any trader wishing to put it in the time and effort to do so.Trading currencies successfully is a combination of two factors:Firstly, you need a successful trading method for long term currency trading success ...Top Ten Reasons to Write a Sales Letter for Each Product? - Part 1 Authors/publishers are great at getting their books written. Entrepreneurs know their products. But after the initial one-year honeymoon, sales slow down. To counter this make sure your ebook, product, or service you offer will keep on selling from the first day, the first year, even for life. Write a short sales letter for each product or eboo ...Buy Cheap Repo Homes From Government Auctions - 5 Tips Every now and then, national and local governments are sponsoring auctions and foreclosure for repossessed homes.It is to be noted that there are more and more people aiming to acquire repossessed homes from such trading activities. The tag prices of repo homes are not as cheap as they expect them to be.But all the more buying repo ...Online Trading Accounts & Published Financial Newletters If you have an account with a broker and are paying ridiculous trading and maintenance fees, now is the best time to sign up with an online investment account. They offer all the great investment products and allow you to make timely decisions on your own terms. Back in 1999 my investment account was with a local broker who charged me $50.00 to ...Here Come the Chinese Will They Run the World?My main interest in China in my childhood years was the Flying Tigers. (Go to: http://www.flyingtigersavg.com/tiger1.htm to learn about the Flying Tigers at their official site.) Retired Air Force Captain Clair L. Chennault was invited to review air operations in China in 1937. He stayed there until the end ...Financing Structure Tips Let us first examine the various parties involved in a financing transaction. On one side of the playing field there is the private company in the process of raising capital. On the other side there are the investors. Investors may include, family and friends, Angel Investors, Private Equity Firms (also known as Venture Capital Firms) and Hedge ...eCommerce for Import Export Companies This year, according to eMarketer, one billion people worldwide will have Internet access and nearly 250 million households will have broadband. Although, Asia accounts for 56 percent of world population, but only 10 percent has access to the Internet at present. With the rapid economic development of Asian countries this figure will increase dr ...Stock Options Trading Speculative activity is carried on stock exchanges through options trading. An option in the stock exchange terminology means ‘a right.’ In an option deal, therefore, the right to buy or sell a certain security within a certain time and at a certain price is purchased from a dealer. It may be an option or right to purchase securities, when it wi ...Relationship Advice: 5 Tips to Make a Strong Marriage Even Better 1. Time together is time during which the complete focus is on each other. That means no TV, no newspaper, no kids. I know, I know, that's hard in our over-busy culture. But stop and consider for a moment: Can you think of many things that are really more important?"So what do we do with this time together?" you might ask. Simple: Talk to ...Choosing A Forex Trading System – Part 5 No discussion of trading system evaluation would be complete without a discussion of drawdown. We must always look at the maximum drawdown of any trading system as it is very, very important.The maximum drawdown of trading system is defined as the greatest peak-to-valley drawdown in a trading system’s equity. Let’s say for example that ...How to Make Sure You Become a Profitable Trader Regardless of your trading style; day trading, swing trading, or position trading there is a simple step by step plan you can use to improve your odds for success.1. Start by paper trading until you can be consistently profitable on paper.2. Regardless of how much money you have, start trading with a small amount of money and wor ...How To Choose a Good MLM or Network Marketing Company? You've heard many horror stories about MLM /network marketing programs. But what you are really hearing about are stories relating to illegal programs or pyramid schemes. Basically, pyramid schemes have no real, viable and worthy product. Obviously, you do not want to participate in such schemes. You want to be associated with a high quality ...Link Popularity Pitfalls As we all know Google uses their PageRank technology to measure link popularity by counting the number of inbound links to your web pages, and it is one of the many factors influencing your ranking. Most website owners do not utilize properly what PageRank they already have. Their linking campaigns could be in vain if they let a large number of ...
|
