Why stock market turmoil is bad for California home prices

Beyond the economic hints the stock market offers, there's also the "wealth effect."

California real estate fans should keep a keen eye on Wall Street’s wild gyrations.

Share prices across the world have been pummeled in recent days by economic doubts raised by tough trade talk from the Trump administration. And while short-term stock volatility is not always tied to business fundamentals, longer-run dips have a habit of signaling economic roadblocks ahead.

And real estate fans should not forget that weak economies are rarely good news for California’s housing market. Statewide prices tend to underperform following stock market downturns.

To see how the plot twists on Wall Street interact with real estate valuations, my trusty spreadsheet crunched the histories of stocks (the Standard & Poor’s 500 index) and California home prices (the Federal Housing Finance Agency’s index) going back to 1975.

To put these two financial benchmarks on a level playing field through a somewhat subdued lens, year-over-year price changes for the 196 quarters over 49 years were pondered.

Just so you know, the S&P 500 has averaged 10.2% annual gains since 1975 compared with a 7% appreciation rate for the FHFA measurements of California home values.

Down years are rare. Prices of stocks and homes had the same winning percentage: they rose in 76% of the 12-month periods studied.

It’s not just the economic hints the stock market offers. There’s also the “wealth effect.”

When consumers’ stock holdings are growing rapidly, folks feel good about their overall finances and are more willing to spend.

Not to mention, a flush portfolio can help provide the crazy kind of cash required for a California homebuyer’s downpayment.

Ups vs. downs

Let’s start simple. How does California housing react after the stock market loses money?

Consider when the S&P 500 was down by any amount over 12 months in the past half-century. In the following year, California home prices increased 73% of the time – slightly fewer gains than average. The annual average price increase was 6.6% a year – modestly below the norm.

Conversely, when the S&P 500 rose over 12 months, these stock-gain periods were followed by California home prices increasing 77% of the time in the next year, a winning percentage a touch above par. And the 7.1% average annual increase was faintly above the norm.

Busts or booms

What real estate fans should carefully track are Wall Street’s extremes.

Contemplate when stocks drop 10% or more over 12 months. Such sharp declines occurred 12% of the time in the past half-century.

California home prices increased a subpar 71% of the time after these stock routs, with below-average 6.7% annual increases in the following year.

Now look at when stocks are in bull-market mode. It’s eye-catching what happens after 20%-plus gains on Wall Street.

These huge one-year upswings happened in 26% of the 12-month periods since 1975. Following a boom year, California home prices grew in value 80% of the time, with 9% average annual increases.

Bottom line

It’s hard to remember New Year’s Day, but the S&P 500 ended 2024 with a lofty 23% gain. These large stock surges are typically friendly to California home prices.

Yet California home prices were up only 5% at year-end 2024, the latest FHFA index update available. So, house prices were soft as 2025 began.

On Wall Street, stock gains were thinned to 7% a year by the end of March. And the S&P 500 fell below its year-ago price this month.

What if the current stock market turmoil continues for an extended period, creating significant losses?

Well, history says California home-price gains will likely thin – with the odds for price losses on the rise.