Although many people assume a direct relationship exists between the stock market and real estate values, statistics indicate little direct or causal relationship. According to CXO Advisory Group, 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.
Between 1968 and 2011, while both variables increased, home price increases were more smooth and steady than stock price increases. Eyeballing the line graph for this period indicates no systematic relationship between home prices and stock market levels. Even plotting just annual prices and changes, you'll see no direct visual evidence to help you make intelligent assumptions about a correlation, either positive or negative. The only conclusion you can make is that both home and stock market prices did increase over four decades.
The strength or weakness of the U.S. and global economy appears to influence both stock and home prices. While this is not surprising, it does not display any other direct relationship between the two measures. For example, a strong economy typically features high demand for products and services, including real estate and investments. During these periods of general prosperity and demand, you could substitute autos, refrigerators or furniture for home prices and see the same overall increases, further confirming the lack of a relationship.
Rising inflation has the same effect on home and stock prices, which increase during inflationary periods. Increasing inflation devalues the U.S. dollar, driving prices for assets upward. Even low inflation rates, such as those seen between 2007 and 2013, force stock prices to rise. While seldom as dramatic as the runaway prices during the housing bubble from the early 2000s through 2007, both home prices and stock market prices increase moderately over time. However, no statistical evidence shows that home prices influence stock prices or vice versa.
One condition may indicate a relationship between home and stock prices, as it has happened before. Both real estate and investments risk the danger of bubbles, when rising prices continue beyond the limits of financial logic. For example, should home prices increase 10 to 15 percent per month for no economic reason, as happened on Cape Cod, Massachusetts, in the mid-1980s, the stock market may follow, defying financial logistics. The stock market may lead or follow housing price trends, but both can exceed logical financial increases. During bubbles -- which eventually burst -- home and investment prices may influence each other to increase beyond reasonable limits before crashing down.
- Adam Gault/Digital Vision/Getty Images