A Tale of Two Markets

Stocks and real estate move hand in hand, right? Actually, no! The last two months have demonstrated as perhaps few other time periods have the decoupling of the Dow and the luxury real estate market. As one rises, the other falls. Conventional wisdom suggests that real estate always moves in lockstep with stocks, but clearly that is not the case. It causes many of us, as real estate professionals, to contemplate how these markets are similar and how they are different. Below are a few of my theories.

– Duration of the commitment. Real estate cycles run slowly. Unlike stocks, properties can’t be disposed of in a day if the owner becomes nervous. By definition that means that there Is less short term volatility both on the upside and the downside. Buying a particular home represents an investment in your longer term future. Buying stock does not.

 – Goals of the purchaser. Nowadays stocks are moved by enormous entities and computer programs. Between hedge fund purchases, pension fund purchases, and program trades, the lone investor no longer influences stock markets all that much. In real estate, on the other hand, every purchase is individual. And individuals tend to exercise more caution.

– Market fundamentals. Stock valuations tend to depend on a number of variables: earnings multiples, sector growth, and innovation, to name a few. Local real estate markets, on the other hand, are driven in large part by consumer confidence and supply and demand. Economic realities can drive stock market growth, but economic perception tends more to drive real estate growth. In the New York luxury market today, a substantial overhang of high end condo inventory has slowed activity and forced sellers to be more negotiable. Even though the actual economic fundamentals are not bad, the chaos in the West Wing and the gridlock in the Senate create negative economic perception. When you combine these two factors, downward price pressure becomes inevitable.

– Leading vs trailing indicators. Stock markets tend to anticipate events. Professional investors tend to look for opportunities on the brink, before they actually occur. We see that today with some of the Dow’s big leaders. Real estate markets, in my experience, react to events. Our markets continue today to react to events like overbuilding and overpricing which were already starting to cause price drops before the election. Our market enjoyed a post-election bump, not in prices but in activity. That’s over now, and caution and the fear of overpaying dominate most segments of the residential market today.

A rising tide, in theory, floats all boats. But different boats float at different speeds. The New York City real estate market continues to function efficiently; transactions are being closed every day. But even as the stock market rises to dizzying, and perhaps unsustainable, heights, unemployment continues to drop, and economic growth continues, property buyers rebel against overly ambitious pricing. They want a good deal or no deal, regardless of the Dow.