The hardest kind of economic relationship to identify is a causal relationship -- one, for example, in which a rise in the stock market causes a rise in real estate prices. In general, economists content themselves with establishing a correlation -- that a rise in one market correlates with a rise in the other.

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The exception is the subprime real estate market meltdown in Most economists agree that a bursting U. CXO Financial Advisory Group did a comparative analysis of U.

It concluded that changes in home prices prior to did not generally correlate with contemporaneous changes in stock returns, but that changes since then suggest a negative correlation with a four-year lag -- i.

Other studies come to slightly different conclusions. A study of U. Seven other studies of the subject referenced in the Okunev paper were divided as to whether the weak noted correlations originated in an integrated market -- that some sort of causality was involved -- or whether the apparent correlations were accidental phenomena in segmented markets.

The most influential of the academic articles cited by Okunev is "What Does the Stock Market Tell Us About Real Estate Returns?

The authors note that a significant part of the value of corporations in western economies is real estate. They propose that changes in real estate values affect corporate valuations, which are reflected in stock values -- that the markets are integrated.

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In , a long U. Banks had made low-interest "teaser rate" loans to under-qualified buyers. When these expired, interest rates on the loans jumped as much as percent.

Investment banks, such as Goldman Sachs, had bundled these loans into groups and sold them to banks, pension funds and foreign investors, both as securitized bonds and as "synthetic" bonds. The latter didn't hold actual mortgages, but simply tied their values to bonds that did -- a legal way of selling the same thing several times over.

This multiplied the severity of the collapse, immediately taking down the entire U. The stock market quickly lost about 60 percent of its value, and the Great Recession of to followed. In this instance, causation seems clear: A failure in the subprime U. Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington. He served as a professor of English at the University of Victoria and was head of freshman English at San Francisco State University.

Gleeson is the director of technical publications for McClarie Group and manages an investment fund. He is a Registered Investment Advisor.

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A Weak Negative Correlation CXO Financial Advisory Group did a comparative analysis of U. Other Studies Other studies come to slightly different conclusions.

The Subprime Meltdown In , a long U. References CXO Financial Group: Home Prices and the Stock Market The Causal Relationship Between Real Estate and Stock Markets; John Okunev, Patrick Wilson and Ralf Zurbruegg Real Estate Economics: What Does the Stock Market Tell Us About Real-Estate Returns? The Big Short; Michael Lewis. About the Author Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington.

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