It’s easy to understand why the recent stock market volatility triggered some into proclaiming that the sky is falling. The potential for losing money can evoke some strong emotional responses. Interestingly, some experts have speculated how the recent stock market activity would spill over to consumer spending, including the housing market. Reporting such as Jacob Passy’s recent article titled “Could Stock Market Volatility Cause House Prices to Fall?” (Marketwatch.com; February 8, 2018) makes for good click-bait. However, the details of the article would suggest otherwise. The consensus is that the recent Wall Street activity is not likely to impact the housing market.
Passy is trying to make an argument that the housing market will suffer from the recent stock correction, and subsequent interest rate increases. But Daren Blomquist, senior vice president of communications at Attom Data Solutions [formerly RealtyTrac], was quoted in Passy’s article saying “The strength of the housing market and economy in general is what’s spooking the stock market.” However, the volatility may make some home buyers wary of making an investment in housing.
The stock correction and increased Wall Street volatility is not a new phenomenon. The last market correction with lasting volatility occurred in June and August of 2015,through the fall. The current stock market volatility is part of the cycle of a healthy economy. Unlike the crash of 2008, current economic fundamentals are positive.
This stock market correction is not unusual, however it is extraordinary.
Seeking Alpha noted that the percentage drop for the two largest Dow losses this year are not even in the top 100 (10 Figures On Historic Dow Correction; seekingalpha.com; February 6, 2018). And this correction is distinct, according to ZeroHedge, because most individual stocks were left intact (If This Correction Is Over, It Will Be Unique in Leaving Most Individual Stocks Unscathed; zerohedge.com; February 13, 2018). Many individual stocks actually made gains while the Dow and the S&P stocks “took it on the chin.” This phenomenon is unique and is said to demonstrate that the economic fundamentals are working.
As for rising interest rates, they are needed to moderate home prices. If home prices aren’t controlled by market forces, such as interest rates, then homes will become unaffordable for many home buyers. Mortgage interest are still historically low, even with recent increases.
Homeownership is out of reach for many home buyers because of increasing home prices. David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices, declared in the January 30th S&P CoreLogic Case-Shiller Home Price Index release:
“Home prices continue to rise three times faster than the rate of inflation. The S&P CoreLogic Case-Shiller National Index year-over-year increases have been 5% or more for 16 months; the 20-City index has climbed at this pace for 28 months.”
Blitzer pointed out that these increases are not based on home buyer demand, stating, “Given slow population and income growth since the financial crisis, demand is not the primary factor in rising home prices.” Instead, sharp home price increases are due to the lack of homes for sale and new construction. And until housing inventory increases, “home prices may continue to substantially outpace inflation.”
Lawrence Yun, chief economist for the National Association of Realtors, remarked that the recent stock market volatility should not impact the housing market. He stated, “Underlying economic fundamentals remain strong.” However, he cautioned that if the stock market retreats further, it could affect home buyers who plan to use funds from their 401k’s and other investment vehicles as down payment sources.
Copyright© Dan Krell
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