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Are Real Estate Market and Stock Market Performances Correlated?

People talk about “the economy” in the general sense so much that many people begin to perceive each aspect of the economy as an interdependent part of the greater whole.

There is some truth to this abstract concept, of course. The economy is full of various interacting industries and markets.

But if you’re going to become a better investor, and ultimately make more money, it’s important to understand that different markets and asset classes function largely independently.

That said, it’s difficult to determine just how interdependent and how independent each of these markets truly is. As an example, we’re going to look at the relationships between two of the biggest markets considered by investors: the real estate market (our specialty) and the stock market.

Are the real estate market and stock market correlated in terms of performance? And how can you use this information to maximize your returns?

The High-Level View

Definitively, real estate performance is not positively correlated with stock performance.

We can say this because of the innumerable examples of periods in which the stock market and the real estate market perform in different ways. There are stock market crashes that have unfolded while real estate prices skyrocket, and there have been real estate market downturns while the stock market has done relatively well.

Of course, it’s also possible to find examples of both markets performing in similar ways; the 2007 housing market crash, followed by the Great Recession, is a great example of this.

In other words, strong or weak performance in one market does not necessitate similar performance in the other area.

But as you might imagine, there are some points of commonality and variables that are relevant to both markets – so we’re going to have to dive a little bit deeper.

Common Ground for Real Estate and the Stock Market

The only way to properly analyze the relationship between the stock market and the real estate market is to look at individual variables and influential factors that are relevant to both.

We can start by looking at points of common ground for the real estate market and the stock market, in the context of the broader economy.

  •       Jobs. Jobs are a commonly cited indicator of economic performance. When a country is doing well, employment is high, and when a country is doing poorly, employment is low. Low employment is associated with both poor stock market performance and poor real estate performance, at least typically. When people don’t have jobs, they often don’t have extra capital, nor do they have a sense of financial security necessary to make major decisions like purchasing a new home. Similarly, they don’t have extra income to invest in stocks, and they may be tempted to sell current stocks in an effort to stay afloat between jobs. Accordingly, when unemployment is high, both markets tend to suffer.
  •       GDP growth. Gross domestic product, or GDP, is an attempt to objectively measure the entire output of a country’s economy. It includes, at least ostensibly, all products and services within the area. A bad GDP outlook is both a sign of and a cause of poor broader economic performance. If various major companies across multiple industries aren’t doing well, GDP is going to decrease. If GDP decreases, companies and influential players may operate more conservatively, causing even more stock market turmoil. When GDP is low or decreasing, it usually means stock performance is already declining, and even if it isn’t, investors may be warier about how they invest in stocks. GDP is less influential over the real estate market, but it still bears some impact; both conventional home buyers and real estate investors are more cautious when major economic indicators like GDP are troublesome.
  •       Interest rates. Federal Reserve interest rates also play a major role in determining economic performance across multiple areas. The Fed determines the rate at which banks can borrow money, which in turn dictates the rate at which banks lend that money to other entities and individuals. Low Federal Reserve interest rates means lower mortgage interest rates, as well as lower interest rates for business loans, which can accelerate corporate performance, thanks to new investments.Real estate investors also appreciate low interest rates because they have a tendency to decrease the value of money, thereby decreasing the value of debt and increasing the benefits of financial leverage. In short, interest rate reductions tend to benefit both stock investors and real estate investors. Conversely, interest rate hikes tend to be detrimental to both parties. As a side note, the Fed often reduces interest rates in response to poor economic conditions, intentionally trying to counterbalance the negative effects of other factors on this list, such as unemployment and negative GDP growth.
  •       Need for individual analysis. It’s also worth mentioning that in both the real estate market and the stock market, broad performance is only one consideration. When the stock market is performing poorly, it’s possible to find individual stocks that perform exceptionally well, offering lucrative returns.Similarly, when the real estate market is performing poorly, it’s possible to find individual deals and local markets that are thriving. No matter what, an individual analysis for each asset is required before making a decision. Accordingly, analyzing broad performance becomes less important for both asset classes.
  •       Funds. Also, we need to acknowledge the prevalence of funds, which allow investors to invest in many different individual assets simultaneously. For example, exchange traded funds (ETFs) and mutual funds allow investors to invest in a basket of different stocks all at once, while real estate investment trusts (REITs) allow investors to invest in entities that buy, sell, and manage real estate.In both areas, funds serve as a way to easily diversify a portfolio and minimize risk, though these broad funds end up making your portfolio more susceptible to broad market trends. Note that this is an advantage in some contexts and a disadvantage in others.

Key Differences Between Real Estate and the Stock Market

real estate vs stock market

If there’s so much common ground between real estate and the stock market, why aren’t they more closely correlated? It’s not hard to imagine a reality in which unemployment is high, GDP growth is negative, and interest rates are relatively high – which should be bad for both real estate and the stock market.

What is it that makes real estate different?

  •       Locality. You can make the argument that real estate depends more heavily on local factors. Even if the broader economy is doing poorly, there are likely neighborhoods in the country that are thriving. For example, areas with job opportunities and relatively inexpensive real estate tend to flourish during times of economic turmoil or uncertainty. It’s true that there are segments of the stock market that can also perform well during economic tumult, but these tend to be less influential on the market as a whole.
  •       “Reality.” Real assets are tangible, and they typically have intrinsic value due to their physical properties or inherent substance. For example, gold is a real asset because you can physically hold it, trade it, and establish its value as an industrial metal (including its versatility as a semiconductor). Similarly, real properties are real assets because you can touch them, improve them, and use them for practical purposes.If there was a devastating apocalypse, there’s a lot you could do with a real property. There’s not a lot you could do with a digital stock certificate. For some investors and according to some perspectives, this makes real assets inherently more valuable. Objectively speaking, this allows real estate to function on a different performance curve than the real estate market; in some cases, real estate performs exceptionally well in times of uncertainty because of its status as a real asset.
  •       Needs and utility. If you own your home, you’re a real estate investor in your own right. The truth is, nobody really needs to own shares of stock; however, everyone needs a place to live. While you could make the argument that businesses are essential for a thriving economy, when it comes down to brass tacks, real estate is more practical and more essential. Again, some investors use this as a basis for the argument that real estate is a superior asset class, but at the very least, we can use this as reasoning for the fact that real estate performs differently than stocks.
  •       The ultimate inflation hedge. Real estate has a unique relationship to inflation. In many ways, inflation is highly beneficial to real estate investors. Low interest rates (often the origin point of inflation) set the course for cheaper mortgages, allowing you to borrow more money at a lower cost and enabling you to take advantage of more financial leverage.On top of that, the devaluation of currency associated with inflation means your debt gradually becomes less subjectively valuable over time, even if the nominal value is the same. For this reason, real estate serves as a powerful hedge against inflation, especially when compared to the stock market.
  •       Income and potential for growth. Finally, real estate provides a convenient path to passive income generation. Dividend stocks do exist, but rental properties are arguably more stable and more powerful in terms of recurring revenue generation.With even a single property in your portfolio, you can accumulate enough wealth and recurring income to fund the purchase of a new one. If you continue following this path, you can gradually snowball your real estate portfolio, adding more and more properties with the assets you’ve generated from your initial purchases. This is possible, but more difficult to pull off with stocks.

Other Dynamics Between Real Estate and the Stock Market

There are some other dynamics between the real estate market and the stock market worth exploring as well.

  •       Perceived wealth and economic outlooks. Both the real estate market and the stock market are dependent upon perceived wealth and economic outlooks. People generally invest in assets only when A) they have extra money to invest and B) they feel good about the future.Whenever the stock market dips, people lose perceived wealth and generally feel worse about the future; this can lower demand in the real estate market, causing stagnation or a downturn in some cases. Conversely, excellent stock performance can encourage more people to invest in real estate. In this specific context, there is some correlation between stock and real estate market performance.
  •       Federal action. When the stock market suffers from a major downturn, pressure mounts on the federal government to take relieving action. This relieving action is often, but not always beneficial to real estate investors. For example, after every stock market crash in modern American history, the Federal Reserve has taken it upon themselves to slash interest rates – resulting in both inflation and less expensive mortgages. In this way, the stock market and the real estate market are somewhat negatively correlated; stock market downturns are sometimes indirectly responsible for improved conditions for real estate investors.
  •       Available capital. And of course, for investors with holdings in these markets, any market disruption could impact available capital, thereby affecting investor actions down the line. For example, if there is a real estate market crash and you lose $500,000 of equity, you may be both less inclined to make new investments and less inclined to take out equity loans for the purchase of new properties. Similarly, if you have significant holdings in the stock market and it experiences a crash, you’ll have fewer options for attaining the money necessary for a down payment on a new property.

How Should the Stock Market Inform Your Real Estate Investing Decisions?

Should real estate investors look to the stock market as a source of information or direction for real estate investing decisions?

The answer is yes and no. As we’ve seen, there’s no true positive correlation between the stock market and the real estate market, but there are some interesting relationships between the two. If you want to make the best possible real estate investing decisions, you need to incorporate all the data you have available to you – and that includes estimating and calculating your own uncertainty.

Ultimately, the success of a real estate investing decision has much more to do with local markets and long-term planning than temporary fluctuations in either the stock market or the real estate market. Accordingly, market performance should only be one of many variables you analyze before making a buying or selling decision.

Balancing Your Portfolio Favorably

Because the stock market and real estate market perform so differently, it’s a good idea for many investors to include investments in both as part of their portfolios. The optimal balance is going to depend heavily on your personal risk tolerance, your investing goals, your available capital, and even your local environment.

Even once you’ve learned all the fundamentals and gained some practical experience in the market, real estate investing can feel opaque – and at times, even hostile.

But the environment and your strategies within it both become clearer when you have the right agents, mentors, and advisors by your side.

At Invest.net, we help people like you buy, sell, and manage real estate. So if you’re feeling lost, or if you just need some extra support, reach out today for a free investment consultation! 

Derek Bryan
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