Home Prices and the Stock Market
March 13, 2012 • Posted in Real Estate
Is there any reliable relationship between U.S. home prices and the U.S. stock market? For example, do falling home prices point to offsetting liquidation of equity positions, or do homes tend to diversify stock holdings? Using annual median sales prices for existing homes from RealEstateABC.com (1968-2004) and the National Association of Realtors (2005-2010) and contemporaneous annual S&P 500 Index data for 1968-2011 (44 years), we find that:
Note that 2005-2008 data is no longer available via the second source, so we use data collected for a prior analysis.
The following chart compares the behavior of the median sales price for existing homes in the U.S. and annual closing levels of the S&P 500 Index over the sample period. Both series generally increase, home prices much more smoothly than stock prices. The average annual increase for home (stock) prices is 5.2% (7.5%), and the standard deviation of annual changes in home (stock) prices is 5.5% (17.2%). The recent housing price bubble is evident. Visual inspection is unhelpful in discovering any systematic relationship between median home price and stock index level.
To examine the relationship more precisely, we compare annual changes in the two series.
The following scatter plot relates annual S&P 500 Index return to the same-year change in the median sales price of existing U.S. homes over the entire sample period. The Pearson correlation for the two series is 0.03 and the R-squared statistic 0.00, indicating that annual home price changes explain none of the contemporaneous variation in stock returns. In other words, homes diversify stocks over the sample period.
Since 1990, however, the Pearson correlation is 0.20 and R-squared statistic 0.94, suggesting some linkage.
Does either series reliably lead the other?
The final chart relates annual changes in home prices to stock returns for various lead-lag relationships over the entire sample period. Results suggest a weak cycle of six to eight years for the interaction between home appreciation and stock returns. Specifically, high (low) stock returns three to four years ago suggest weak (strong) home appreciation now. Similarly, strong (weak) home appreciation now weakly suggests low (high) stock returns three or four years from now.
Note that the sample is short in the context of analyzing multi-year cycles.
In summary, evidence from the past 44 years indicates no contemporaneous relationship between the stock market and the residential real estate market. There may be a weak, inverse, multi-year relationship.
Cautions regarding findings include:
- The available sample is small for the subsample since 1990 and the lead-lag analysis.
- Increasing financialization of real estate as an alternative asset class via funds may cultivate a positive link between real estate and other asset classes.