Economists tend to disagree on whether there is a true causal relationship between the stock and real estate markets. However, recent data shows that when the stock market goes up or down, home prices follow. When tracking home prices in San Mateo County against the Dow Jones Industrial Average (DJI), between the dotcom crash of 2000-2002 all the way to today, you can see almost identical trend lines. The above chart shows clearly that for nearly every peak and valley in the DJI there is a corresponding fluctuation in home prices.
As a Realtor who has represented numerous buyers throughout my career, I believe there is at least one obvious link between the stock market and real estate markets. It is common for buyers to use stock investments to help fund down payments on home purchases. This is especially true in regions like San Mateo County, where in the month of April a 20% down payment on the average home would have been roughly $375,000. Since most people are not able to save this amount of money in a short period of time, stock based investments and company stocks are the typical source for the down payment. For these people, a surge in stock value means a surge in purchasing power. Therefore, it’s not all that surprising to see home prices ebbing and flowing right alongside the stock market.
While it’s not necessarily a proven science, the theory at the very least passes the eye test. If you’re looking for an indicator of where San Mateo County home prices could go next, keep an eye on the stock market.