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Three Cents Worth: No Real Estate Jones For The Dow

[Our man Jonathan Miller throws caution to the wind this week (special Friday edition!), mixing stocks and real estate on the very same graph. (Warning: Miller is a professional. Do not try this at home.) The graph below shows the Dow Jones Industrial Average (red line) and the average Manhattan sales price (white line) from the first quarter of '89 to the third quarter of '05. The y-axis runs from 0 to 14,000 (keep dreaming, baby) for the Dow and to $1.4 million for sales prices.]

Let's face it. The New York City real estate economy gets a lot of its verve and swagger from Wall Street. After a vibrant year, end-of-year bonuses for investment banks are expected to be at record levels. Historically, these dollars have percolated through the real estate economy after the first of the year. (Of course, sometimes there's nothing bubbling: Wednesday was the 18th anniversary of the '87 stock market correction, a day I mark on my calendar every year. Like the first moon landing, I remember where I was on that day (BBQ joint in Kansas City, in case you were wondering).)

I thought it would be fun to look at the real estate market juxtaposed along side the Dow Jones Industrial Average because there is the natural tendency to compare the various stock market indexes to real estate prices as some sort of predictor. I can't tell you how many times I am asked about correlation between the two markets.

After the jump, why your Manhattan pied-a-terre is a good hedge against all those GOOG shares you bought last week.

Well guess what? The chart lines may seem to follow the same direction, but in my opinion, there is no real correlation. As far as stocks and real estate go, each market behaves differently and it is merely coincidence if they follow the same trends.

Besides low mortgage rates, investors moved from stocks to real estate over the past five years to escape the volatility of stocks. Stocks can be traded in seconds by investors all over the world for a relatively small transfer cost. Real estate markets are high dollar localized transactions whose assets provide a use even when its value drops.

So basically this chart tells us nothing, but I guess thats the point.
· Dow Jones Industrial Average vs. Manhattan Average Sales Price [Miller Samuel]