Correlation between real estate and stock market

[eastbay]

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.

I've done some googling but can't seem to summon the data (beyond a decade or so) to see if there is any evidence that this is true. Is this a known fact or a known fiction?

Any good links to historical data?

eastbay

[Sniper]

Hi eastbay,

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.

[eastbay]

[ QUOTE ]
Hi eastbay,

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.

[/ QUOTE ]

Of course. You can also bury your money in Pringles cans in the back yard. But I think the point remains.

I think by "largest market" you mean most trading volume. That isn't particularly relevant. The question is: is there a dominant flow between stocks and real estate. You can have people trading trillions in forex daily and it's irrelevant if it isn't diverting money that would otherwise be earmarked for real estate or stock market.

By the way, I found that the answer is a resounding "yes" for the past 20 years.

eastbay

[1C5]

Real Estate has been hot, but the boom can't last forever. It will be a shame for those who invest at the peak which has to happen sooner or later.

[Sniper]

Your original premise was this...

[ QUOTE ]
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.

[/ QUOTE ]

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...

[ QUOTE ]
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.

[/ QUOTE ]

Here's some more info on forex...

[ QUOTE ]
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.

[/ QUOTE ]

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.

[Elaboration]

[ QUOTE ]
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.

[/ QUOTE ]

But it is a + correlation, which would appear to contradict what OP is suggesting.

[squiffy]

You are right. But the question is how much wealth do consumers have invested in various things.

Do average Americans have 10 trillion dollars in commodities? Or is it mostly in mutual funds and in real estate?

For the average American, real estate and stocks are the main investment vehicles.

[Sniper]

[ QUOTE ]
You are right. But the question is how much wealth do consumers have invested in various things. Do average Americans have 10 trillion dollars in commodities? Or is it mostly in mutual funds and in real estate? For the average American, real estate and stocks are the main investment vehicles.

[/ QUOTE ]

You are forgetting to account for the actual distribution of wealth!

The vast majority of wealth is held by a relatively small group... lets call them the top 10%... and thus in $$$ terms, a vast amount of $$$ is allocated to investments other than the stock market or real estate.

Additionally, beyond 1st home purchases, relatively few people actually invest in income producing property. Certainly much less than the number of people who have 401Ks.

[squiffy]

Good post re: real estate vs. stock price studies.

But if the economy is strong and people are earning lots of money and are employed, they should invest. And traditionally they have invested in stocks and real estate.

Since interest rates are low and tax laws favor purchasing real estate, and since we just saw a stock market bubble burst, it makes psychological and economic sense that people would put money in real estate.

But this won't always hold true. It really depends on many different factors.

I am sure the creation and popularization of 401Ks gave a huge boost to the stock market as it became easier for Americans to invest in mutual funds and save for retirement.

[eastbay]

[ QUOTE ]
Your original premise was this...

[ QUOTE ]
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.

[/ QUOTE ]

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...



[/ QUOTE ]

Obviously I know there are more than two, but it's still a legitimate question as to whether there is enough of counter-flow to produce a negative correlation.

As I also pointed out before, volume in FOREX could be entirely irrelevant, for example if FOREX trading is independent of stocks or real estate markets.

I'll take a look at the links.

eastbay