A. When attempting to analyze any type of market behavior, it is helpful to remember that markets behave irrationally. There never is just one factor or a fully definitive answer as to why markets behave the way that they do, in good times or in bad. Conventional wisdom indicates, however, that cyclical markets will seek an equilibrium point.
Recent examples illustrate this point. The last time the stock market values dropped significantly was after an extended period of unprecedented increases in stock prices. At the time of the increases, the market performance far outpaced the supporting economic data so when values began decreasing it was viewed, by many experts, as a time of correction. The housing market also reflects this cycle. We experienced extreme and largely unexplainable home value appreciation for several years prior to a few years of depreciation. In many markets, housing prices have started to increase again as buyers create new demand. Once that demand begins to outpace the supply of homes that has built up in recent years, prices will increase to an even greater extent.
While the extent of these cycles is yet to be determined, it is very reasonable to expect that a sense of normalcy will return to both the stock market and the housing market. It also helps to remember that the best time to buy and invest is typically when the price is low so if you have the ability to do so, it is a good time to look at your options and make some wise investments, whether they be in real estate or stocks.
This Tip is part of Scott Arney's educational series, entitled The Serial Decision Maker.