It’s Not That Simple: Are Real Estate and the Stock Market on Parallel Tracks?

Do New York City residential real estate and the stock market always move hand in hand? Last week I spent an interesting evening at The Real Deal annual forum at Lincoln Center, where I heard a panel discussing the state of the commercial and residential real estate markets here in New York City. I was particularly interested in hearing several of the panelist express their opinion that our residential market rises or falls in lock step with the stock market. While the two phenomena are clearly related, I think the reality is more nuanced than that observation suggests.

First, there IS a close relationship between the performance of the stock market and the city’s residential market. All real estate is local, and just as real estate in Houston is highly influenced by fluctuation in the oil markets, real estate in New York is very sensitive to fluctuation in the financial markets. Finance is our home town industry, so how it fares has a big impact on how the city fares as a whole. Tax revenues, real estate sales, charitable giving – all depend substantially on the health and wealth of Wall Street.

That said, real estate has really been somewhat decoupled from the stock market over the past ten years. We first noticed this change in 2000, when we saw the tech boom end and real estate sales and prices move up as the stock market moved down. People were disenchanted with stock in the wake of the Internet bubble and the appealingly concrete bricks and mortar aspect of property made it an attractive alternative.

That led of course to the real estate boom and bust, and now people are disenchanted with real estate in much the same way they were with tech stocks a decade ago. Fortunately for us here in New York, we were always primarily a first home market rather than an investor market. Our market dropped later and recovered earlier than almost any other in the country.  And today’s lower prices, combined with the continuing tax deductibility of mortgage interest and the once-in-a-lifetime interest rates, remain compelling incentives for many buyers.

Both the stock market and residential real estate sales are barometers of consumer confidence. But the sort of confidence they require is slightly different. Securities, into which an investor can make quick forays, small or large, are highly opportunistic investments.  Real estate is long term, especially today. No one is buying for a quick sale or a quick profit. So a real estate purchase requires confidence about the future, which is in short supply today. That’s why, even as the stock market topped 11,000 last week and the large bonuses forthcoming for Wall Street winners were touted in The Wall Street Journal, our residential sales market remains hesitant. We did not, and I predict will not, see a big bounce in response to the rising stock market and the record bonus numbers. Well priced properties continue to sell, some with multiple offers, but buyers have no appetite for a stretch.  Before our market accelerates again, buyers want more concrete signs of recovery than a rising stock market alone can provide.