“Stocks will go back up when the housing market settles” or “The housing market will pick up once the stock market settles” are common refrains. Is there any truth to this? Perhaps.  Does this relationship have historical precedence? Let’s see.

CXOAdvisory provides a nice historical perspective of this using annual median home price data from RealEstateABC.com (1968-2004) and the National Association of Realtors (2005-2008) and contemporaneous annual S&P 500 Index data for 1968-2008 (41 years).

In the spirit of a blog, I will present two charts from their work that answers the questions- Might home appreciation systematically lead or lag stock returns, and how closely related is the housing and stock market?

(Of note a correlation of +1 indicates a positive linear relationship and a correlation of -1 indicates a perfectly inverse relationship. A correlation of 0 indicates no relationship between the variables).

The correlations remain in the range of .12 through -.30. Hence, data from the past 41 years indicate little or no relationship between the equity market and the residential real estate market.

The variation in home appreciation explains only about 1% of the variation in stock returns.