Eighteen months of stock market grief have stimulated a flight of capital into real estate, helping keep the housing market strong, industry observers and insiders say.
Yet this shifting of investment from stocks into real estate may be nearing its end, some argue. As a result, the housing market, considered a supporting beam for the for the broader economy, could see some trouble.
"Housing has really been one of the key things keeping the economy out of recession," said Mark Zandi, the chief economist at Economy.com in Philadelphia, who added that home equity has given many households much-needed liquidity.
And in the past year a flood of money from cashed-out stock holdings has entered the housing market, Mr. Zandi said. "But that cash pile is being drawn down and won't be there to support housing as we make our way into next year."
For now, however, investors are still looking to real estate. Sources cited strong price appreciation, a healthy equilibrium of supply and demand, and disappearing stock-market profits as reasons for this.
Andrew Heiberger, the president and chief executive officer of Citi Habitats Inc., the largest rental agency in New York City and one of the top sellers there, said the company's list of clients seeking investment property had tripled in a year.
"Last year at this time we had roughly 500 people actively searching for condominiums that they could buy and then re-rent, and this year we have upward of 1,500," he said. "And the single biggest reason is the stock market."
The buyers are attracted to real estate because it has not been hit as the rest of the economy has, Mr. Heiberger said, and the long-term outlook for many regions remains good. Certain pockets of properties have seen a 10% to 15% correction, he said, but this does not come close to the wallops some stocks took.
Not all buyers are looking for rental properties, however. Many who a year ago were not looking to buy are seeing poor performance of stocks and the retirement accounts and getting into real estate.
Most are buying residences for themselves, with a long-term view - moving up to larger homes or acquiring second homes - and an eye to a better return on their money.
Martin Hale, a real estate agent at Citi Habitats, said many Wall Street executives have been calling him to put whatever they have left from stock investments into real estate. "I have five clients right now who are looking for property to buy when they get their bonuses," he said. In addition, Mr. Hale said, many clients, facing expectations of near-zero growth in their 401(k) plans for 2001 and 2002, are borrowing against or tapping into the plans to buy real estate.
Though the actual amount of money moving from stocks to real estate is impossible to calculate, anecdotal evidence says buyers are using unusually large amounts of cash in property transactions.
Average down payments grew almost 14% this year, compared with a home-price appreciation rate of 6% to 10%, according to Mr. Zandi. In June, he said, the average down payment jumped to $34,700, compared with a year earlier, when it was $30,500; in June 1999 it was $28,700.
"Down payments have really just skyrocketed since the market started to weaken in early 2000," he said, which is "evidence to suggest that people are using their cashed-out stock holdings to finance home purchases."
Stuart N. Siegel, the president and chief executive officer of Sotheby's International Realty in New York, said that, judging by the speed at which his company's properties have been closing and the intensity of bidding, people appear to be sitting on cash this year.
For example, Mr. Siegel said, a client who was renting a $10 million home one day decided to buy it - and closed within 72 hours.
"To me that says that they didn't have to sell into the market, that there was a substantial amount of cash liquidity available," he said. "And in various shapes and degrees, we're hearing that kind of thing happening all over."
Mr. Siegel said that Sotheby's Lehman Mortgage Services, a jumbo mortgage lender that his firm formed with Lehman Brothers last year, has seen modest loan-to-value ratios, with substantial cash equity in most deals.
David Lereah, the chief economist at the Washington based National Association of Realtors, said his organization has been noting the same thing for about six months.
"You can see it in the increase in second homes and vacation homes, and also the demand for higher-priced homes," he said. "So reflected in that data, you can assume that some of that money is coming from stock market portfolio shifts."
Some observers warn that the real estate market is now a bubble on the verge of bursting, and some homebuyers are worried about getting in at the top of the market.
Yet several industry sources argued that current appreciation rates are the result of "good old supply and demand." Most importantly, they said, speculative construction and investment - the cause of past bubbles - has been held in check.
"I don't think there's so much a value bubble," said M. Leanne Lachman in New York, a principal at Lend Lease Real Estate Investments Inc. in New York, which has $35 billion of residential and commercial mortgages under management.
In both the commercial and residential sectors, she said, "there has been a bit more construction than we would have liked to have seen, but that's now coming to a screeching halt." Ms. Lachman described the current real estate environment as in "structural equilibrium" and the supply-and-demand picture as "pretty solid."
Mr. Lereah argued that the current residential environment differs from bubbles of past years because there are no signs of overbuilding. Supply is relatively lean, he said, so even if demand comes down a bit, prices are not going to plummet. "Home-price appreciation should slow, but I don't think it will fall out of bed," he said.
And with the fits and starts of the major stock markets, investors have grown tired of waiting on the sidelines with their money, several said. As a result they are moving in and making the investment.
"A lot of people are going ahead and making their decision now," said Mr. Siegel. "They're not happy being sidelined and not having entered the market - in effect they want to move on with their lives."
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