Your original premise was this...
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A common sense idea is that when people have extra money to invest, they have two main choices: stock markets or real estate. Given that people are tending to make either/or choices, when one is hot, the other should cool, and vice-versa.
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Your premise is flawed because these are not the only two choices that people make as to where they should invest their money, as I detailed...
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There are MANY more options for investments other than the stock market or Real Estate. FOREX (foreign exchange), for example, is the largest market in the world.
Futures, Commodities, Gold, Bonds, Art, Diamonds, Coins, Private Businesses, collectables, etc are all other examples.
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Here's some more info on forex...
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The Foreign Exchange market, also referred to as the "Forex" or "FX" market is the largest financial market in the world, with a daily average turnover of US$1.9 trillion -- 30 times larger than the combined volume of all U.S. equity markets.
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For more info on correlation studies between Real Estate and the Stock Market, take a look at these...
http://www.hotelschool.cornell.edu/c...f/restock.html
http://money.cnn.com/2003/02/25/pf/i...ng/realestate/
http://business.fullerton.edu/financ...1/v08n1a02.htm
http://www.investopedia.com/articles/05/021105.asp
http://www.bailard.com/Newsletter/Q4...iew_q42002.htm
http://recenter.tamu.edu/TGrande/vol8-2/1461.html
Bottom line: One of the appealing aspects of Real Estate investments is that they have low correlation to the stock market, and thus are useful for diversification purposes.