S%26P%20versus%20Case-Shiller.gif
Sorry folks, but as noted, we screwed the proverbial pooch when we originally posted our reader’s S&P 500 versus Case-Shiller Index chart. Our greatest sin of which we do know better, posting a chart without inspecting the underlying data. That being said:

According to the April 2010 S&P/Case-Shiller Home Price Index, single-family home prices in the San Francisco MSA rose 2.2% from March ’10 to April ’10, down 36.0% from a peak in May 2006 but up 18.0% year-over-year.

For the broader 10-City composite (CSXR), home values rose 0.7% from March to April reversing a five month slide but remain down 30.5% from a peak in June 2006 (up 4.6% year-over-year).

On our other axis the S&P 500 is currently up 11 percent year-over-year having fallen 14 percent since the end of April, down 34 percent from an October 2007 peak, and back to September 2003 levels ignoring the roller coaster that commenced at the end of 2008.
April Case-Shiller Index: San Francisco MSA Up At Top But Down Below [SocketSite]

Comments from Plugged-In Readers

  1. Posted by PostIt

    My my. How to read this one?
    A stock market bubble fueled a real estate bubble which then fueled another stock market bubble precipitating a rift in the time-space continuum and collapse of all things bubbly.
    It is interesting to note that S&P collapses are largely coincident with CS downturns. It might suggest that the recent market pullback will dampen the housing rebound…
    I’ll bet that the success of locally-based companies is a stronger predictor of SF RE values. Does anyone have Bloomberg access to BBACAX, the San Francisco composite? I can only get back to 2005…

  2. Posted by lol

    Another thing that I remember from the post dot-com crash: people threw themselves into Real Estate as a safer bet than stocks. They expected less appreciation and more security overall. What they got was more appreciation followed by the same kind of downside that stocks offered.

  3. Posted by Brahma (incensed renter)

    What lol said. Even if you wanted to stick to equities, if you’d had your money in domestic REITs exclusively over the period from the end of the dot com bomb until early 2007 and you would have significantly outperformed the S&P 500 (course you’d have gotten killed in 2008).

  4. Posted by ex SF-er

    Many people including me interpret the data thusly:
    A worldwide credit bubble formed, but it was first centered on stocks. the rationale was that the internet would change productivity and profits. Thus the tremendous .com and equities meltup. As the stock bubble collapsed our fearless leaders tried to re-trigger it, but the money went into Real Estate and other assets instead.
    This combined with novel credit instruments (synthetic credit default swaps and collateralized debt obligations) led to a major credit bubble the likes of which have been seen only a handful of times in history. it affected almost all asset classes… stocks, bonds, housing, student loans, commercial paper, precious metals, commodities. That credit bubble is now unwinding.
    there is clearly a strong correlation between stock performance and RE although it is not 1:1. what is harder to tell is whether or not the rising equity valuations CAUSE rising RE values, or if instead it is the conditions that lead to rising stock valuations that also lead to rising RE.
    I think the above explanation is consistent.
    it would explain why stocks rose so high so quickly in the late 1990’s with a delay in RE appreciation (the “wealth effect” usually has a time lag).
    it also helps to explain the meteoric rise in RE valuations starting in 2000. (it’s when the new credit instruments were being rolled out in higher numbers).
    it also shows why RE and stock have become more correlated since 2000 compared to before. If you put other asset classes on there my guess is that you will see a similar trajectory the last few years. (commodities, art, muscle cars, etc)

  5. Posted by Legacy Dude

    I may be alone on this, but I continue to believe this is more coincidence than causality. Possibly some correlation tied to both indices being drive by the same underlying economic fundamentals, but that’s about it, and it’s impossible to adjust for the illiquidity of real estate.
    Out of curiosity, though, what’s the r squared for S&P vs. top tier? I’d guess no higher than 40% from just “eyeballing” it. Maybe a bit higher if you clip the run from ’03 onwards…possibly speaks to the transformation of real estate from shelter to big chip: just another bet in the casino economy.

  6. Posted by J

    The Banking Act of 1933 was a law that established the Federal Deposit Insurance Corporation (FDIC) in the United States and introduced banking reforms, some of which were designed to control speculation.[1] It is most commonly known as the Glass–Steagall Act, after its legislative sponsors, Carter Glass and Henry B. Steagall.
    “The Gramm-Leach-Bliley Act passed in November 1999, repealing portions of the BHCA and the Glass-Steagall Act, allowing banks, brokerages, and insurance companies to merge”
    The Gramm-Leach-Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999: http://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bliley_Act

  7. Posted by peon

    It is fun to speculate about charts, but one must always keep in mind that famous saying: correlation (if there is any in this case) doesn’t imply causation.

  8. Posted by PostIt

    Ex-SFer
    In a nutshell what you are saying is that the advent of the internet indirectly precipitated a world-wide financial crisis. I suppose this disruptive technology was as advertised!
    In some respects economic depression as a consequence of technological breakthroughs is predictable: Major breakthroughs beget major speculation, inapproriate expansions of credit (and reflexive contractions), resets of valuations, etc. The panic of 1873 (and long depression) was preceded by the “second industrial revolution”. A similar argument can be made for the panic of 1837, immediately preceded by the first industrial revolution.

  9. Posted by ug

    “back to September 2003 levels”? It seems to me it might be more accurate to say back to January 1998 levels (for the S&P at least).

  10. Posted by ex SF-er

    @peon and Legacy Dude:
    I think we all agree that correlation is not necessarily causation, although it was perhaps said most succinctly by peon.
    that said, I do think significantly rising stock valuations do have a stimulative effect on housing valuations through the so-called “wealth effect”.
    @Postit:
    you make an interesting analysis of my post. Initially my brain rebelled against your characterization but as I re-read your post I agree with your description.

  11. Posted by A.T.

    The most notable aspect of this chart to me is the very close correlation over the last 23 years between SF real estate prices and the composite price index. So much for the theory that SF real estate performs differently from or better than anywhere else.
    The correlation between RE and the S&P is actually not very tight.

  12. Posted by NoeValleyJim

    I think supports the idea that it is not just incomes that support home prices in San Francisco. But it is entirely possible that a loose monetary policy boosts both the stock market and high priced homes.

  13. Posted by lol

    Bubbles always a good story behind them. Tech was revolutionizing everything. Wealth unlocked from RE would provoke a virtuous circle that would ultimately detach from its original feeder. These promises were kept for the most part: everything is interconnected. OK, we got more housing than before. Maybe too much…
    The Tech bubble happened on the back of the first and second computerization of corporate entities. 1 – Get numbers and names into computers. 2 – Get business logic into computers. More productivity, less menial jobs, more growth. It worked. The investments from the 70s and 80s really bore their fruits when things started to be connected and brought into user-friendly PCs. That’s the 3rd wave. The 4th wave of the late 90s brought global connectivity. All these stories are real. The gains of productivity as well. Everyone got crazy but there was a good reason behind.
    The Real Estate bubble had several different stories: classes of new migrants and minorities had to get their own American Dream. Middle class wanted to enjoy the fruits of their work and jump 2 notches on the ladder (the lower class was climbing up, pushing hard). Upper class wanted to do a land/wealth grab before the middle class got too close from their sensible nostrils.
    The means: creative financing would “unlock” endless possibilities away from sclerotic regulation. Borrow money, invest it and the profits will more than cover the money borrowed. Government was the problem. We got rid of that pesky little thing and the protections along with it.
    As far as a correlation between Stocks and RE, I disagree with A.T. Once RE was freed from its regulatory chains, it behaved like stocks. Before, a salary would decide on your purchase. You make 100K, your house cannot be more than 500K. With 0 down neg-am, your house can be 1M or more. When rules fade away, what you can buy mostly depend on your level of comfort towards risk. Houses started to become like stocks.

  14. Posted by hangemhi

    i’m curious what percent of american’s own stocks (outside of retirement accounts) vs what percentage of SFers.
    But there is definitely a correlation btwn stocks/RE prices now in SF – for how long i don’t know. i just know that people who need hundreds of thousands of dollars for down payments are effected by the stock market far more than anyone else…. and the S&P’s ups and downs matter far more than $8k tax credits.
    and as NVJ points out (and everyone else ignores) it isn’t just incomes that support SF prices – that and other reasons lead to the disconnect btwn rental prices, sales prices, and income to dept ratios in SF. maybe it shouldn’t be so big here – but there will always be a disconnect of some sort here.

  15. Posted by been there

    Interest rates anyone?
    Perhaps more telling would be to compare the CS composite to (the inverse of)long term interest rates, i.e 10 yr, 30 yr. I believe that would better explain the nationwide composite index move from ’87 to ’05. 10% mortgages in 1987 went to 4% in ’05. Affordability drove prices

  16. Posted by Boesky

    People here are spinning narratives and not looking at facts. Narratives don’t sell $1.3B worth of the Cheyenne SIV to CalPERS in 2006. AAA ratings do.
    The ratings agencies sold regulatory (BASEL, ERISA, etc…) licenses to mortgage bond issuers so they could market their wares to institutions and banks. And the institutional investment managers used the ratings as a delegated proxy for their legally required due diligence.
    The FDIC reported that 81% of the $249 billion of CDO collateral pools issued in 2005, or $200 billion, was made up of residential mortgage products [FDIC Outlook, Fall 2006, at 7.]
    Why residential mortgages? Strong historical repayment performance. Milken did something similar with junk bonds. Use old data (from stronger borrowers) to justify high ratings for new products with wildly different default probabilities. The problem is counter-performativity. To meet the higher demand for the “Investment” rated structured product a lowering of the underwriting standards is required.
    From 2000 to 2007, Moody’s operating profits averaged 53% (beating Microsoft). For 5 years in a row they had the highest profit margin in the S&P 500.
    Its not as difficult as we’re all trying to make it. It’s regulatory arbitrage, and it’s a good business to be in (ask Warren Buffett).
    I’m 28 years old and some of you guys should read more.
    On another note: I heard Lembi financed all his properties with wealth squirreled away from years of prudent stock-picking.

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