The real estate 1% and the S&P 500 are secretly connected

CoreLogic links high-end home sales to stock market index performance


Analyst Sam Khater at CoreLogic (CLGX) walks through a look comparing ultra high-end home sales versus homes sales on the lower end of the pricing segment.

So what is happening with the residential real estate 1%? (That’s not rhetorical flourish – Khater notes that historically, homes that sold for $1 million or more accounted for 1% of all sales.)

The real estate “1%” has benefited from the gains made in the financial markets over the past three years.

There is a little variance in this segment constituting 1% even in the good and bad times – the share of million-dollar home sales was below 1% for most of 2003, but steadily increased between 2004 and 2006, reaching as high as 1.8% in April 2006, when national home prices peaked.

Even after the real estate bubble started to burst, the share of million-dollar-home sales continued to increase, peaking in June 2007 at 2.2%, more than twice the share just five years earlier. Although the overall housing market was clearly slowing by then, the $1million share remained high, averaging nearly 2%, or twice the historical level, until August 2008.

With the market collapse in September 2008, $1 million home sales tanked.

But it wasn’t long in the dumps. By February 2009, the $1 million-plus sales share was back to 1%, the same level as in December 2003.

Then as the financial markets stabilized and rebounded in the second half of 2009, so did the sales of $1 million-plus homes with the share rising to 1.5%, Khater reported.

Over the next three years as the S&P 500 steadily rose and eventually hit all-time highs, the $1 million-plus home sales share also rose, reaching 2% by mid-2013 and remaining at that level since then.

For real estate’s “1%,” the stock market is a barometer of the wealthy consumer’s confidence, Khater concludes. This is clear given that $1 million-plus home sales and the S&P 500 are highly correlated.

In fact, he notes, the S&P 500 serves as a very good two-month leading indicator of million-dollar home sales. While the S&P 500 dipped in the last few weeks of January 2014, as of mid-February, it remains at roughly the same level as in December 2013, so one can expect million-dollar home sales to remain strong as long as the stock market remains high.

Meanwhile, Khater says that there are many lower-price segments enjoying healthy sales growth, but not all.

The fastest-growing sales segments are those with prices between $650,000 and $950,000, where sales are 33% higher than a year ago.

Home sales in the $350,000 to $650,000 range are up 26% year over year. Sales are clearly weaker in the $150,000 to $300,000 range, up only 12% from a year ago.

Sales below $150,000 are contracting, but that reflects several factors, including the rapid run up in prices and the decline of REO, investor and cash sales, which are concentrated in this segment.


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