Stocks Helping Fuel California Home Sales

Documenting for the first time the stock market’s pervasive role in California’s housing market, a new survey shows that a substantial 15% of all home buyers in the state are using stock market proceeds as a source of down payment.

The study by the California Assn. of Realtors underscores the real benefits of the booming stock market for individuals, but also the economy’s growing attachment and vulnerability to Wall Street’s fortunes.

“It gives me the willies,” said John Wong, broker-owner of Prudential California Realty in San Francisco.

While stock gains are helping more people get into homes and diversify their assets, Wong said stock market wealth is also behind some of the real estate bidding wars in the overheated Bay Area market. In some cases, he added, buyers with stock profits are forgoing appraisals and inspections so they can beat out rivals.

“There is concern that some of the day-trader mentality could spill over to the housing market,” said G.U. Krueger, a California Assn. of Realtors economist, referring to those who buy and sell stocks rapidly for short-term profits.

The survey, based on 436 brokers who responded to an April poll on their first-quarter transactions, is being released today. CAR said brokers routinely learn where buyers get money for their down payments in the course of helping them find homes and line up financing.

The booming stock market’s role in the robust spending of consumers during the near-record economic expansion has been noted by such observers as Federal Reserve Board Chairman Alan Greenspan, who has voiced concern about the effect when the stock market makes an inevitable decline.

But stocks’ specific role in the housing market apparently has not been measured before, according to national housing experts. CAR, which conducted the statewide survey in April, said it was the first time the group polled its 5,000 member brokers about the stock market.

Analysts said the CAR results are much higher than they had expected, even for California. In a nationwide survey a decade ago, the Census Bureau found that just 4% of home buyers were using proceeds from the sale of real estate and all other investments as a source of down payment, with almost all of the rest reaching into savings or equity from their previous homes.

“For years and years, people thought the wealth effect on consumption was pretty small,” said Richard K. Green, a real estate economist at the University of Wisconsin-Madison. But the CAR data, he said, suggest that the paper gains many are realizing in the stock market are quite profound.

Krueger described the survey sample as fairly representative of the housing market in California, where stock ownership plays a much greater role than elsewhere in the nation because of the state’s high share of high-technology firms.

Predictably, the study found that higher-end home buyers were more likely to cash in stock market profits to finance home purchases. But the use of market profits was spread across income groups.

A growing number of modest wage earners and first-time home buyers appear to be tapping into the stock market by virtue of the 401(k), the popular employer-sponsored tax-deferred retirement savings plans in which most individuals can invest in equities through mutual funds. In the CAR survey, 42% of those who used stock instruments for down payments on homes were first-time buyers.

Guillermo Martinez, a 46-year-old painter, drew on his 401(k) to get into an $80,000 house in Fontana. “Without it, I wouldn’t have had enough,” said Martinez, who is moving from a rental in East Los Angeles.

In stock-financed deals, the median price of the house sold was $285,000, compared with $240,000 for all transactions reported in the survey. (The actual median price of all California houses sold in April was about $218,000.)

Steve Goddard, broker-manager at Re/Max Beach Cities in Manhattan Beach, said at least 10% of the customers at his 125-broker office are now supplying down payments with the proceeds of mutual-fund withdrawals and other stock sales.

In one case last year, he said, a couple who worked at Microsoft Corp. started shopping for a house in the $450,000 range, but six months later wound up buying a property nearly twice as expensive because their company stock had risen dramatically during that time.

Not surprisingly, the CAR survey suggested that stock-financed housing sales are more common in the Bay Area. That region saw the state’s sharpest home appreciation in the first quarter, jumping 14% from a year earlier to a median sales price of $334,590.

“The market is so high around here, you have to do something to get the down payment,” said one frustrated buyer in San Francisco who asked that his name not be used. Unlike years ago when he bought a house with equity from his previous home, he said, that’s not enough this time around.

To the extent that stock market gains are contributing to sharper home-price climbs, industry executives and analysts worry that it may exacerbate the disparity between those who can and cannot afford a home. Even though homeownership rates for all groups have risen in recent years, the supply of affordable housing has continued to decline.

“Overheated markets are of concern [because] you don’t get steady gains, and exacerbate the disparity in housing,” said Nicolas Retsinas, executive director of Harvard’s Joint Center for Housing Studies. Retsinas said he is starting to see more people using stock funds to buy second homes, but he still found the 15% figure in the CAR survey surprisingly high.

The housing market’s greater dependence on the stock market suggests that housing sales could take a tumble in the event of a sharp plunge in stock prices.

But there appear to be clear gains for consumers, who are both spreading their risk by buying homes and getting tax deductions in the bargain.

Krueger and other economists say that housing prices in most parts of the state are less likely than the stock market to fall sharply because the supply of new homes is not keeping up with demand.

Meanwhile, notes James F. Smith, chief economist at the National Assn. of Realtors, even as more investors are selling stocks to buy houses or move up, many homeowners are also taking equity out of their homes to buy other things--including stocks. “It’s a two-way street,” he said.