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Old 09-17-2005, 12:19 AM
eastbay eastbay is offline
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Default Correlation between real estate and stock market

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
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Old 09-17-2005, 08:38 AM
Sniper Sniper is offline
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Default Re: Correlation between real estate and stock market

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.
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Old 09-17-2005, 12:39 PM
eastbay eastbay is offline
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Default Re: Correlation between real estate and stock market

[ 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
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Old 09-17-2005, 01:20 PM
1C5 1C5 is offline
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Default Re: Correlation between real estate and stock market

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.
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  #5  
Old 09-17-2005, 09:15 PM
Sniper Sniper is offline
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Default Re: Correlation between real estate and stock market

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.
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  #6  
Old 09-18-2005, 12:07 AM
Elaboration Elaboration is offline
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Default Re: Correlation between real estate and stock market

[ 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.
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  #7  
Old 09-18-2005, 01:45 AM
squiffy squiffy is offline
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Default Re: Correlation between real estate and stock market

This is a very important topic you raise. I have been quite interested in it myself. But its a complex issue.

It will take me awhile to research it. But some preliminary thoughts.

First, in theory, yes, investors have a finite amount of cash, and they do tend to follow the herd and follow the most recent investment returns.

So if investors put 90% of their free cash in stocks, they have less to invest in real estate, and vice versa.

I suppose it's theoretically possible for Americans to put precisely 50% of their free cash in stocks and 50% in real estate, but psychologically, I would think people would all rush to one-side of the boat, when that investment seems hot.

People tend to get manic.

But I think we also have to be careful not to jump to hasty conclusions. The issue is much trickier than it seems.

Most recently the real estate boom was made more dramatic when the fed lowered short term interest rates to stimulate the economy. Lower interest rates meant it was much much much cheaper to borrow money. So it was much cheaper to buy homes, and home prices were bid up.

But if I recall correctly, housing had been hot even before the Fed started lowering rates.

As a matter of logic, and I think I read this somewhere, generally stocks and housing do well when the U.S. economy is strong, when people have a lot of jobs, and are productive and earning a lot of money. This makes sense. To invest in stocks and real estate, consumers need money.

So there are multiple factors here. When interest rates are low, it's easier to finance home purchases. But it's also easier to finance car purchases, and so people bought lots of cars from Ford, GM, and Toyota, etc. which should have tended to push those stocks up for a time.

So you also have to watch your definitions. It may be rare to have both stocks and real estate be manic and overvalued at the same time, but both can be on an uptrend at the same time.

Another way to attack the problem is to identify particular periods in history. For example, it's easy to find books that discuss stock booms and busts. So identify a few periods when the stock market was booming, say the late 1920's and when it was busting in 1929. And then find a book on real estate that studies what happened during that time.

I would think that when the stock market went bust in 1929 and we had nationwide bank failures in the early 1930s, that real estate prices went down during the depression, because who could buy land if millions were out of work and businesses were hurting?

So you really have to study individual periods and compare.

One factor is the strength of the economy and employment. Do people have the money to buy?

Another factor is interest rates.

Another factor is mortgage and bank lending laws. What loan products are available? Legal changes can promote or retard ownership. At one time in this country you could not get a 30 year mortgage. So it was harder to buy land. Introducing easier credit made it possible for more Americans to buy homes. Giving tax credits or deductions for mortgage interest, and sheltering real estate gains from taxes also promotes investing. There have been some new tax laws, which allow people to sell, after living in the home for two years, and allow you to pay no tax, up to a certain amount of profit. That has certainly made real estate more attractive.

Another factors is bank failures. When banks are healthy real estate loans are easier to get and credit is easier to get. When banks have made many bad loans, it may be harder to get money to buy land.

So you really need to study many different factors to understand why a particular investment is booming at a particular time. It is rare for all elements to be present at the same time to create that perfect storm.

When the Berlin Wall fell and the communist nations started to collapse, in the long-term this reduced pressure on the U.S. to keep increasing defense spending (at least temporarily) so this may have freed up tax money or reduced taxes -- for investment in business or stocks.

There is a 9/17/05 WSJ article which states that Since 1999, Americans' equity in their homes has soared 68% to nearly 10 trillion dollars in this year's first quarter, according to Federal Reserve data. During the same time, the value of stocks and mutual fund shares held by households and nonprofit groups has declined 18% and also equals about 10 trillion.

So it's a bit deceptive and hard to reconcile your personal observations with national data.

My home in Fresno I bought in July 2002 for 200K. It appraised at 420K in Aug. 2005. But prior to say 1998 or so, I am told by Fresno realtors that homes have never boomed in their memory.

My home in Dallas I bought in 1993 for 183K. Today it is only worth about 250K, if that.

So is there really a NATIONWIDE real estate boom??? Or are certain major markets hot. NYC, California, Florida etc. which gives the perception of a nationwide boom.

Remember, real estate is mainly regional and local. Whereas the stock market truly is a NATIONAL clearinghouse and even includes much foreign investment.

So it's hard to even discuss this topic because it is hard to define what we mean. If it's true that American consumers have 50% of their wealth in both real estate and stocks, then why should one be booming and the other not?

Are there fewer stocks? And too much real estate? Not all real estate is booming. It is booming most in cities that are popular to live in and where land is scarce.

Also, we are not considering foreign investment and commercial investors.

Also, it's a bit deceptive to say I put my money into real estate.

What did I do when I bought my Fresno home? I actually put no money down. Literally no downpayment. I just signed a paper promising to pay say 1300 a month in payments over 30 years at 6%. And I pay property taxes, etc.

So there is some cash drain. But it's not like I took 200K off the stock market and put it into the home.

And my equity in the home is all theoretical and on paper. If I sold it today, I might get 420K. But that is just based on what the last home sold for. Tomorrow, things could change, and I might only be able to get 380K or less. Who knows?

And I also spent money to buy furniture and to hire cleaning people and a handy man. So if people buy new homes that can stimulate the economy for home depot, for restaurants, and for employees, who in turn spend money.

So shouldn't a booming home sales market stimulate a boom for Home Depot and Lowes and garden supply stores and carpet companies and furniture stores?

I took out a new mortgage to cash out my equity and got 95K in cash. Guess where I put it. On the stock market with Scotttrade. And remember, the bank loaned me the money based on the theoretical value of my home. If my home price drops back down to 200K for some weird reason, they will have loaned me money on a home which isn't really worth what the bank thought it was.

So even taking one American consumer, it's pretty darn hard to figure out or predict how these factors will interact.

I understand lots of people are tapping their theoretical home equity to buy cars, take vacations, buy furniture, do home repairs, etc. that all stimulate the economy and business. And this should help stocks and the stock market.

So it's very complicated. I will try to post more as I read more. But I think it's helpful to look back historically and also to study the nationwide data.
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Old 09-18-2005, 01:54 AM
squiffy squiffy is offline
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Default Re: Correlation between real estate and stock market

Two books I would recommend, though they don't fully answer your question are:

Irrational Exuberance by Robert J. Shiller who traces the history and causes of stock market mania. He discusses mania in prior historical periods.

Note Shiller is also very public about his opinion that many real estate markets are overvalued, and is trying to work on methods to hedge against a decline in real estate equity. This is discussed in the WSJ article I mentioned from 9/17 called "New Tools to Hedge Your Home" but I really don't think any of the products mentioned is all that helpful. They are too new and are not really focused on specific markets. BUt they are interesting to read about.

Another book, though I don't agree with all the author's conclusions, though his data is interesting -- is How to Profit from the Coming Real Estate Bust by John Rubino. It has some interesting statistics on real estate.

By the way, some people have said they don't find the WSJ all that helpful for stock investing. But I would highly recommend reading it. I think if you want to be a successful investor, you really need to understand more about finance and economics in the U.S. and the world.

You need to understand real estate, stocks, retirement accounts, CDs, 401Ks, etc. And money management in general. And papers like the WSJ are an education.

It's just common sense that if you want to be successful in life, you need to work hard and study hard. And what sets humans apart from all other animals is our ability to think.

If you are NOT studying important things like finance and economics, you WILL PAY A PRICE, you just won't realize it until it's too late.

Oh well. They are taking away my soap box. So that's all for now.
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  #9  
Old 09-18-2005, 01:57 AM
squiffy squiffy is offline
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Default Re: Correlation between real estate and stock market

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.
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  #10  
Old 09-18-2005, 02:01 AM
squiffy squiffy is offline
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Default Re: Correlation between real estate and stock market

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.
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