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Mr. Kambiz Merabi remarks on the correlation between U.S. stock market (as a whole) and real estate as a whole.

Although many people assume that there is a direct relationship between the stock market and real estate values exists, Mr. Merabi believes there is no direct or causal relationship. Mr. Kambiz Merabi believes that over time the median sales price for existing U.S. homes and the annual closing level of the Standard & Poor 500 Index do show that both components generally increase. However, there’s no confirmation of causation between stock market indexes and demand for homes or their prices.

Mr. Merabi demonstrated that Historically, how closely are not correlated,  U.S. real estate price performance and U.S. stock market price performance are!

Kambiz Merabi was asked  at his weekly staff meeting on this Friday, has any historical correlation been coincidental or is there a theory of why real estate price movements and stock market price movements would be correlated?

He replied are you referring to U.S. real estate as a whole and the U.S. stock market as a whole, not specific geographies (e.g., Los Angeles, NYC) or companies (e.g., Netflix, Amazon) or industries (e.g., Tech, Automobile).

He responded this is a great question, but probably very complicated to answer because the real estate industry is the foundation of the economy and so interlaced, and Weaved to the fabric of the rest of the economy.

I’d say if we want to find the answer to this question, we must and need to be very specific as to  what aspect of the RE/CRE market we really want to compare against the stock market.

 

To simplicity sake, for example let’s assume we care about pricing which will be the (appreciation). For this, we can use the very popular S&P / Case-Shiller Home Price Indices.

The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate both nationally as well as in 20 metropolitan regions.

Here’s a chart comparing the index against S&P 500:

 

As you can see in the picture, based on the image, the stock market has appreciated quite a bit more than the home price index. However, there are many caveats to consider.

We can discuss the advantages / disadvantages to invest in one asset as opposed to the other asset.

We need to draw a comparison between the two investment strategies. It’s a riskier choice to invest in the stock market than the RE/CRE, given the current volatility in home prices, but it may be the best way to build wealth.

My research, and knowledge helps me to understand how between late 1960 and 2011, while both variables increased, home price increases were more smooth and steady than stock price increases. Reviewing the line graph for this period indicates no systematic relationship between home prices and stock market levels. Even intrigue just annual prices and changes, you’ll see no direct pictorial evidence to help you make intelligent assumptions about a correlation, either positive or negative. The only conclusion I can make and see is that both home and stock market are very subtle to interest rate upsurge and inflation.

Kambiz Merabi February 9th, 2018 LA

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