If you follow the stock market, you're aware that there is no shortage of bubble talk. Since the market bottomed in March 2009, stocks have gone mostly up. The S&P 500 Index, the most followed market barometer, has tripled over the past six years. The latest run nearly matches the run during the Internet boom in the 1990s. That boom went bust in 2000, and stock prices were nearly cut in half in the ensuing two years.

Over the past few weeks, Chinese stocks have lost over 30%. This has investors thinking a similar sell-off could occur here. We don't think it will, but the prospect of a stock-market sell-off conjures a question: How would a sell-off impact housing?

A rising stock market increases the wealth effect – a theory that when people feel wealthier they spend more. People invested in stocks have certainly felt wealthier in recent years. At the same time, home sales and construction activity have trended higher. It appears housing and stocks are positively correlated.

It's not so clear cut, though. No doubt that when people feel wealthier they upgrade their lifestyle, such as by trading up to a larger home. But the correlation between stocks and housing can be fuzzy. After the sell-off in stocks in 2000, housing activity actually rose. Many investors burned in the stock market wanted a new asset class; housing was that asset class.

To be sure, stocks might tank, but that doesn't mean housing will tank with it. We think housing is sufficiently sound to stand on its own independently of the stock market. That said, we'd prefer not to find out.

Information provided by Jessica Regan.

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