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Cramer: How the Real Estate Market is Like the Stock Market

By Jim Cramer

Maybe pricing in real estate is more like stocks than we tend to think. Think of the way real estate moves up and down in value. Demand starts high, but prices initially stay the same. That’s the glut of inventory being worked off. We have been waiting for that to happen for two years, but it hasn't.

After the supply is worked off, the price of real estate starts to go higher. Then the volume of home sales starts to slow, but prices still go up for a while. Finally the number of homes sold goes down and pricing falls as well. That’s where we are now.

Stocks follow the exact same pattern. When a sector gets hot, say energy for the last few years, you initially see lots of volume in the group, but prices don't  move up because the sector has been languishing and there’s been no real interest.

Then demand for stocks in the group increases and prices start to go up. That's the truly bullish phase. In time, demand -- in this case the number of shares bought -- goes down but prices keep going higher. That’s the most perilous time because that’s when the speculators come in,  but the smart money is going out. Some people hold on for dear life and refuse to sell, thinking that things have to get better. That causes the volume to dry up.

At some point, sellers realize that it isn’t getting better and they bail. Again, that's how it played out in the energy group this summer, when volume soared and prices crashed. When that happens, the cycle is complete.

In California, the hardest-hit areas of real estate experienced this pattern. We reached the phase when sales dried up and prices kept rising in 2006. In 2007, people came to their senses and realized they couldn’t hold on to their properties if they had borrowed a lot of money. So they sold. Others, hit by foreclosure, also sold at the same time.

Then six months ago, the number of homes sold started to go up and really soared in the fall. That led to price equilibrium, the first stage of the upswing, which is where we are now. Of course, prices had to fall 40% for that to happen.

Now it is worth watching these markets because if they follow the pattern of stocks, there will be a lot of homes on the market, so sales volume will pick up and prices will follow.

Because the markets are similar and because pricing discovery is better,this whole exercise is no longer just a paper chase. So, if I wanted to build a real estate portfolio, I would look first for the volume spike and the price equilibrium -- as we are seeing in the southern part of California known as the Inland Empire -- to see if the buys aren’t flourishing already given that homebuilders are going bust all of the time out there. I know that from reading the Real Estate Implode-O-Meter.

Monitoring volume and prices in the housing market, just like with stocks, should produce some profits down the road.

It's worth thinking about it like that, now that you can buy nationally through local banks that are interested in providing you low rates in the town of your choice.


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