How does the housing market track equity prices?
What is the relationship between single-family realty markets and equity markets? What are their similarities and differences? Can we draw any insights to guide investment decisions?
Below is a chart that compares the standardized returns for a single-family residential property index (SFR), with the Dow Jones Industrial Average, the S&P 500 Index and the Nasdaq composite over the past 11 year. This chart was constructed using the total estimated value for all single-family residential units that were built before 2012 and will still exist in 2023 (72.2 millions units nationally). This avoids inflating the SFR incorrectly with the value of newly built properties.
All four series show a close correlation from 2012 to late 2016. This is before equity indexes and Nasdaq begin to move away from SFR. Although the returns on Nasdaq seem to be higher than the others, it is important to remember that these values do not include dividends paid to investors.
Although dividend payments are quite common in S&P and DJIA, they are extremely rare in Nasdaq. The value of their shelter or the rent they receive form tenants is another way that homeowners can receive a dividend.
We all know that the sudden drop in equity values at the beginning of the pandemic was followed up by an unprecedented rise in stock and real estate prices, especially in the technology sector. Although there has been very little research on the links between equity markets and real property markets, it seems that technology workers, who benefited from both new wealth in stock options and increased salaries due to intense competition for talent, may have contributed to the acceleration in real estate valuations.
This effect was also dispersed geographically because the same tech workers became untethered at specific work locations.
With rising inflation and corresponding rises in interest rates, the party stopped or at least slowed down. Surprisingly, equity values reached their peak in December 2021, but SFR valuations continued to rise for seven more months. Both the DJIA and S&P dropped to levels similar to the SFR before stabilizing. This lag was almost certainly due to capital flowing out of suddenly destabilized stock market and into real estate.
Real estate is making a comeback
Although there has been a steady decline in SFR values over the past few years, it has not been as dramatic as the equity indexes and has not been as dramatic as many prognosticators had expected.
What is boosting real estate valuations? One reason could be that after decades of low inflation, and interesting rates, we’re now able to re-discover one of the most important purposes of real estate investing: hedging against inflation. Capital tends to flow to tangible goods such as real estate and gold in inflationary periods. Their long-term value is less susceptible to being lost.
The interrelationships of stocks and real estate become more interesting when we examine specific geographies or market segments. This is what the future articles will explore in this series.
Vince O’Neill serves as the Chief Economist at Plunk.
Trends in the housing market
stock market performance