Real Estate and the Stock Market
by Jim Scott

Clients often ask how much the stock market effects residential and investment real estate. This was not always an important question. Fifteen years ago relatively few households participated in the stock market. Today most families have assets in both arenas resulting in a new and important linkage between the two markets. 

The 'Wealth Effect' and the Price of Real Estate 
The 'wealth effect' is a phrase used to describe the relationship between stock prices and consumer spending. The more wealthy people feel as a result of paper or actual gains in the stock market, the more likely they are to spend money for goods and services. But does this translate into higher real estate prices in our market?

If you examine the upscale real estate markets of West Los Angeles, Manhattan and Santa Clara and San Mateo counties(Silicon Valley), you will find the answer is an unqualified yes. Those markets are experiencing appreciation rates much higher than in San Diego. Empirical and anecdotal data show that buyers in those markets are converting their stock market gains into home purchases. This has created an unprecedented seller's market. 

But a stock market reversal can hurt real estate prices. The real estate recession that began in 1987 in the Northeast was precipitated by the October 1987 stock market crash. Most analysts argue that a stock market correction is due. If that happens, is the San Diego real estate market vulnerable to a sharp decrease in prices? 

Community Income vs. The Wealth Effect
In my opinion, the rate of appreciation of residential real estate in the 92103 zipcode, now approaching 15% per year, would be reduced by any major downturn in the stock market. We would not suffer nearly as much as the three markets referred to above. First, since we are in the early stages of a recovery cycle, our pricing structure has not been distorted as is occurring in other markets with higher rates of appreciation. Second, our aggregate community income growth is lower than in those other areas. This has moderated the rate of real estate appreciation in San Diego in 1997 and 1998. This makes our market a more stable and safer environment for investing in real estate.

I have now participated in three recovery markets. In spite of several strange purchases in the first part of the year, buyers in the 92103 market have shown remarkable restraint in not overbidding for properties. The rate of price increases has further been tempered by the 125% increase in inventory since last March. 

While it might appear our lower community income is a negative, it is a real positive in that it brings order and safety to our real estate marketplace. We are still early in our cycle, remember that inflation-adjusted prices are still below the market peak of 1990. In spite of the recent price increases, the market is still well-priced. 

You can reach Jim Scott by email or at his office at 1111 Fort Stockton Drive. Jim's direct line is 885-9511. 

Jim has been a homeowner in Mission Hills since 1976. Scott & Quinn is the oldest full service real estate company in Mission Hills. There is also a professional property management team on staff.