How Stocks Effect Manhattan Beach Home Prices

Manhattan Beach is an affluent city with median household income registering more than twice the national average.  Higher income means residents have more financial assets than the national average, linking wealth more closely to the up and downs of stock markets. That’s the theory, at least, so I decided to test home price sensitivity to the stock market to see how Manhattan Beach real estate compares to Los Angeles, and to U.S. housing, in general.

Simply eye-balling a ten year chart of Manhattan Beach median home prices per square foot and S&P 500 prices isn’t clear one way or another. The period from 1996 to 2007 showed almost constant growth in Manhattan Beach median home prices, while the stock market saw a sharp rise, then crash with the dot-com bust, followed by another relatively sharp rise from 2002 to 2007.

The financial method for measuring sensitivity of one asset to another is to calculate the “beta” of that asset to the benchmark against which you’re comparing. Here’s how beta is calculated:

The subscripts, “a” and “p” reference the “asset” and the “portfolio” against which you’re measuring. In our case, “a” is for Manhattan Beach median home prices, and “p” is for dividend-adjusted S&P stock market prices. Home prices were sourced from Zillow.com and S&P 500 data was sourced from Yahoo Finance, all data being monthly and spanning the last 10-years.

It turns out that home prices, in general, are not very sensitive to stocks. U.S. home prices have a beta of 0.04, meaning they only move about 4.3% with stocks. Los Angeles home prices, on the other hand, show significantly higher stock market correlation, with a beta of 0.18. Manhattan Beach home prices blow both out of the water, with a beta of 0.33!

To keep things in perspective, a beta of 0.33 isn’t earth shattering. It means that for every 1% move in stocks you’ll see, on average, a corresponding 0.33% move in Manhattan Beach median home prices. What’s interesting is how that compares to Los Angeles and to national home prices:

My guess is that Manhattan Beach is more sensitive to the stock market because residents here hold more financial assets, which makes net worth more sensitive to stocks. Los Angeles does significantly better than the broader U.S. market, but still comes in at only about half of Manhattan Beach.

If this relationship continues, we can expect home prices to take a turn for the better in the near future, given a sustained, sharp stock rally off the 2009 lows. Manhattan Beach residents and potential buyers in the area have surely seen their fortunes rise with the market. It’s only a matter of time before that wealth effect overflows into Manhattan Beach real estate.

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