Though it fell nearly 150 points Thursday, the Dow Jones Industrial Average has been setting record highs in recent weeks, while home sales are at their lowest level in nearly four years. Some experts say real estate's swoon is freeing up money to bolster stocks.
That could explain why one of the strongest stock market rallies on record has come at a time when gasoline prices are soaring, the overall economy is slowing and home sales are down.
Financial planner Kim Dignum started telling clients about 18 months ago that if they were heavily invested in real estate, it might be time to sell. The housing market in Fort Worth, Texas, where she lives was still going strong. But Dignum didn't want to push her luck.
"As we say in my business, pigs get fat and hogs get slaughtered," Dignum says. "It never hurts to take something off the table when you've done well with it."
Last summer, Dignum decided to follow her own advice. She sold an office building that she owned and invested the half-million dollars in proceeds in the stock market. That turned out to be a good call.
"Let's say it's a very lucky call," she says. "I'm realistic; the market's done extremely well, as we all know."
Since last summer, the Standard & Poor's 500 index is up about 20 percent. Meanwhile, real estate, especially housing, has been flat or falling in much of the country.
In Portsmouth, N.H., Chris Adams began to rethink his real estate investments last year. The software engineering manager and his wife had bought a couple of condos in 2000 for their retirement nest egg.
But maintaining the condos turned out to be more trouble than they wanted, especially after their son was born. And Adams worried about resale value.
"Prices seemed to be going down a bit on the condos," he says. So we were starting to get concerned that maybe there would be too many units down the road for us and we wouldn't be able to sell."
Luckily, the Adamses found a buyer for one of their condos and put the proceeds into stock mutual funds.
Now many investors like them, and Dignum, are fortunate to be riding a wave of cash out of real estate and into the stock market, as investors cash in profits or dodge losses.
Money is flowing into U.S. stock funds at the fastest rate in three years. Senior Economist Michael Swanson of Wells Fargo says that for better or worse, money tends to roll uphill to whichever investments have done well lately.
"The stock market's been doing well, so people want to get in while the action's good," Swanson says. "The housing market has been doing poorly. So there's kind of a two-edged boomerang working there."
That wave of new cash is one of the factors — along with strong profits and a flurry of mergers — pumping up the stock market.
At the same time, an exodus of investors' money is taking air out of the real estate bubble. U.S. economist Nigel Gault of Global Insight says it's just the opposite of what we saw a few years ago.
"If you go back to the early part of this decade, the stock market at one point was almost in free fall and real estate was the investment of choice," Gault says. "It took us many years to move from that to the present situation, where real estate is out and equities are in."
Of course, money can only slosh from one sector into another for so long before the tide starts to reverse again. Dignum says there comes a point in any rally when the next big thing becomes the last big thing, and investors who arrive late tend to get left high and dry.
"Unfortunately, that's what so many investors do," Dignum says. "They'll call and say, 'My golf buddy had the greatest thing in the world, and it's up 40 percent. Don't we want to get some?' No, we certainly don't," she says, with a laugh.
New Hampshire investor Chris Adams says he doesn't expect to get back in the landlord business any time soon. Whatever risk the stock market might have, he says, mutual funds don't call in the middle of the night to complain that the toilet is backed up.
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