Musings

27 February 2013 - 10:48, by , in Musings, No comments

San Diego Real Estate or The Stock Market?

I recently was in a conversation about how great the returns in San Diego Real Estate have been since the “recovery” began and how they made the stock market look terrible.

Now this is difficult conversation to have – because it’s like comparing a cantaloupe to a kangaroo – you can eat both, but they have about nothing else in common.

Real estate is not a homogeneous asset – that is, there are many types of real estate: multi-family, single family, commercial, luxury, etc.  Price discovery is also very difficult in real estate, as no two properties are the same and the frequency at which they trade is very low.  Real Estate is most often purchased with leverage – which can magnify returns or losses, whereas the Stock Market is usually purchased on a cash basis.

The best metric that I could find to represent the San Diego Real Estate Market was the S&P/Case-Shiller Home Price Index for San Diego.

You can learn more about the Index construction and methodology here:

http://www.housingviews.com/

The best metric I think to measure the stock market was the  S&P 500, you can learn more about that index here:

S & P 500

Now before you read on – two questions?

During the past 25 years -which asset do you think has performed better and what are their respective returns? No cheating, write them down.  I could do a whole rant here on anchoring and behavioral finance but we can save that for another day.

Onto the data:

S&P/Case-Shiller Home Price Index for San Diego, numbers are the % change in price

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
8.41 16.34 17.42 -0.06 -2.56 -4.18 -3.53 -1.12 -1.70 0.46 7.62 12.56 11.05

 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
15.69 9.32 19.08 17.64 24.21 5.56 -4.49 -15.28 -23.54 4.53 0.51 -5.01 9.53

S&P 500, total return, includes dividends:

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
16.61 31.69 -3.10 30.47 7.62 10.08 1.32 37.58 22.96 33.36 28.58 21.01

 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-9.10 -11.89 -22.10 28.68 10.88 4.91 15.79 3.53 -38.49 26.46 15.06 2.11 16.00

 

The average return for Real Estate in San Diego was 4.56% with a 11.05% standard deviation.

In any one year, if this was a normal distribution (too lazy to check), 68% of the San Diego real estate return between -6.49% and 15.61%.

The average return for the S&P 500 was 11.2% with a 18.44% standard deviation.

In any one year, if this was a normal distribution (too lazy to check), 68% of the S&P 500 return would be between – 7.24% and 29.64%.

The correlation between the two data series was 0.28.

Looking at the data – the stock market won, however the leveraged return on real estate could change that outcome.

The key thing for me was the correlation coefficient – a number close to zero is good.  At 0.28, these two assets show little correlation between their return pathways.

The conversation shouldn’t be stocks or real estate, but rather stocks and real estate.

I wonder if there are any kangaroo and cantaloupe recipes out there…

Bye for now.

About author:
Damien is the founder and owner of Lanyon Advisory Services and has a extensive knowledge and experience in financial planning and wealth management.

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