by Martin Chapman

Created on: July 02, 2008   Last Updated: July 05, 2008

EFFECTS OF THE HOUSING MARKET ON THE STOCK MARKET

Buying a house is the most important investment we make in our lifetime. What we often forget is that one housing transaction leads to a whole series of transactions, which generate income and jobs for the economy and boost Stock Market earnings. Furthermore, the Wealth Effect of owning a home affects consumer spending behavior, which is critical as consumption represents over half of US National Income.

WHO DOES HOUSING BENEFIT DIRECTLY?

If you look at the S&P500, you will see that the weight of all Home Builders together makes up a very small proportion of the index. However, both Home Builders and Home Buyers need to buy good and services from other parties.

Home Builders need building materials, e.g. Timber, Steel, Cement, Bricks, Tiles, Insulation, Cabling and Glass. They buy or lease their equipment,e.g. diggers, trucks, cranes, loaders, saws and drills. They need the services of planners, architects, garden designers, accountants, lobbyists, brokers and bankers, as well as their own office and on-site staff.

The house buyer will get a loan from his banker and will need house- and life- insurance. He will probably use the services of a mortgage broker or real estate agent and engage an architect. When the family move in they will need house alarms, furniture, carpets, wallpaper and they will maybe have a new kitchen or bathroom put in. They will purchase new fridges and freezers, cable TV, phones, computer and internet services and visit the garden centre.

If a new housing estate is being built then we are talking about new infrastructure, i.e. roads, water, sewage systems and connections to the power-grid and to the phone lines. Shopping malls, supermarkets, hairdressers and various amenities will open. Then new councils will be established to raise taxes and administer the community.

THE NEW FINANCIAL INDUSTRY - PROFITING FROM THE HOUSING MARKET

A year ago Pimco's Bill Gross warned us that Financial Institutions held $300 billion of worthless sub-prime securities, which they are now admitting and against which they making provisions in their balance sheets. But what has this to do with the housing market and the stock market? Well everything!

There is a whole financial industry out there based on the housing market. After making loans to customers to finance their homes, many banks securitize or sell their mortgage book to other institutions. These mortgage securities are basically bonds, which are backed by

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