In normal conditions, investors turn to stocks when real estate offers little promise, and head for property when equity returns taper off.
However, the last few months have shown an unwelcome correlation between two generally separate investment arenas: The benchmark Dow Jones Industrial Average of blue chip stocks sagged 4.3 percent from mid-April through mid-July and, at the same time, most key real estate market indicators sagged in New York City. Inventory rose and time on the market increased, though high-end properties kept median prices fairly constant.
But pundits differ on how stock market performance affects real estate prices.
How it affects New York real estate purchases is a bit more clear. It’s more about the volume than its direction, said Jonathan Miller of appraisal firm Miller Samuel.
“It’s a big misconception that the directions of indexes allow you to anticipate the real estate market,” he said. “It’s the churn, the volume of trades, that would likely have more of an impact on real estate.”
Greater trade volume generates greater profits, and in a city where high-end real estate is bought and sold by the titans of finance, there’s a link between yearly bonuses and apartment purchases.
“I think when you look at Wall Street, the first thing to zero in on is income and jobs,” Miller said. “When everybody makes more money, it affects real estate purchases.”
While the stock market is not on pace with last year’s, the economy is doing quite well, said Susan Wachter, professor of real estate and finance at the Wharton School of business at the University of Pennsylvania. Indeed, the number of private sector jobs nationwide increased by 368,000 in June, according to a report released by Automatic Data Processing, a payroll services company.
Real estate established itself as a separate asset class in 2000, following the collapse of the stock market and the end of the technology boom, said Frederick Peters, president of Warburg Realty Partnership.
“Certainly [the market] affects real estate purchasing,” he said. “It doesn’t affect it precisely the way it used to.” Before the crash, the real estate market would imitate the stock market six months later, Peters said.
“People, when they’re unsure about the stock market’s future, they want something they can see, touch, feel,” said Gregory Heym, the chief economist for the brokerages of Terra Holdings, including Brown Harris Stevens and Halstead.
The Dow Jones Industrial Average and the average Manhattan apartment sale price have seemed to rise together over the years, a chart (below) by Miller Samuel shows. But Miller noted that there is no correlation between the two graphs; their similarity is coincidental, he said.
While there’s uncertainty about what bonuses will be in December, people in the finance industry are more preoccupied with the amount Federal Reserve Chairman Ben Bernanke will raise interest rates, Heym said. Some economists worry that the Fed will overinflate interest rates.
At the end of June, the 30-year fixed mortgage rate was 6.8 percent, up from 5.8 percent at the same point last year, but still nearer to historic lows than prohibitive highs.
Rising interest rates don’t just affect mortgage payments, but also affect the overall economy, which in turn affects real estate, Peters of Warburg said.
“I think the issue with interest rates is what are they a reflection of,” Peters said. “To the degree that interest rate changes are a reflection of the Fed concern with inflation and to the degree that concern with inflation could slow down the whole economy, it definitely affects my industry.”
Generally, economic factors work in concert and affect both the real estate market and stock market, rather than creating a direct correlation between stocks and real estate.
“Fluctuations on Wall Street always affect real estate buying,” said Steven Spinola, president of the Real Estate Board of New York. “How Wall Street goes, so goes New York City real estate.”
Sometimes the financial market does not seem to have any relationship to the real estate industry.
“The greatest increase in real estate was when the market was doing nothing between 2002 and 2005,” said Ron Gallen, a Manhattan financial counselor. “That was an unbelievable boom.”
On Wall Street, (bonus) size matters
Of course, bonus size is driving real estate purchasing decisions for Wall Street bigwigs — and this year’s dividends climbed to a record level.
The yearly payouts by Wall Street firms contribute more to decisions affecting New York real estate than the movement of the market, said Ron Gallen, a Manhattan financial counselor.
“The record bonuses are making people buy higher-priced apartments,” said Debbie Baum, senior associate broker at the Corcoran Group.
Bonuses have “empowered those people that got really big bonuses to go ahead with the real estate they were already hoping to buy,” said Frederick Peters, president of Warburg Realty Partnership.
A real estate purchase does not always immediately follow receipt of a bonus.
“People that are getting these bonuses and are buying real estate may not buy the first year,” said real estate appraiser Jonathan Miller. “They have it in their purchase arsenal.”