stock market Archives - Real Estate News and Commentary

Each time the stock market plunges there’s speculation about a wide spread economic contagion. Talking heads and news headlines predict doom and gloom, as well as speculating about the effects on the housing market. Because Wall Street reacts to all types of news and events, the effect of a stock crash on the housing market can vary. But are stock corrections and housing slumps connected?

If you want to see direct effects of stock corrections and housing slumps, you need only look at the stock market corrections in 2015 and 2018. Both stock market shocks were reactions to events in the US and globally. The extended stock sell-off during 2015 was a reaction to China’s currency devaluation as a result of their low GDP as well as poor economic data that came from the EU. The steep equities decline that happened during August through September of that year was bad timing for the housing market, as it occurred when the fall market was gearing up. Consumer confidence dropped and home buyers were concerned about home values. As a result, home sales slowed during the fall of 2015.

Moving forward, February 2018 is one of the most volatile trading months in recent history. That month saw two of the largest daily losses of the Dow Jones Industrial Average (both over 1,000 points). The market correction was due to Fed rate increases and concerns of inflation. The stock market correction occurred before spring home buyers were out in full force, so the short-lived event had minimal effect on home sales. Although home prices continued to post gains, existing home sales declined the second half of the year after an active spring and summer.

Are stock corrections and housing slumps connected?

This month’s stock market one-day plunge was likely tied to tariffs, trade and currency wars. The large decline occurred after China devalued its currency so as to make its consumer goods cheaper in the face of increasing tariffs.

Regardless of the impact of equities, it’s important to point out that home sales have been inconsistent throughout the year. A July 23^rd NAR press release indicated that existing home sales are 2.2 percent lower than last year. Chief NAR economist Lawrence Yun stated, “Home sales are running at a pace similar to 2015 levels – even with exceptionally low mortgage rates, a record number of jobs and a record high net worth in the country…” Although it may feel like we are repeating the housing cycle of 2015, it’s for different reasons. Like then, home sale inventory is low and home buyers are anxious about increasing home sale prices. However, differences include low mortgage rates, high consumer sentiment, and a stronger economy.

Although the overall effects of current stock volatility on the housing market may be minimal, equities corrections are typically harsher on upper bracket and luxury homes. Demand for starter homes will remain high, while upper tier homes will have to adjust pricing. Yun stated “Imbalance persists for mid-to-lower priced homes with solid demand and insufficient supply, which is consequently pushing up home prices…”

Although stocks rebounded the next day, we really don’t know yet if this is the beginnings of stock correction or a one-day event, so there is no way to gauge an immediate effect on home buyers. However, A July 17^th NAR report indicated that foreign home buyers have been affected by a slowing global economy and low US home sale inventory. The NAR Profile of International Transactions in U.S. Residential Real Estate 2019 indicated a 36 percent decline of foreign investment in U.S. residential real estate from last year. It’s likely that foreign investment may further erode as a currency war develops.

By Dan Krell
Copyright © 2019

Original located at https://dankrell.com/blog/2019/08/27/stock-corrections-and-housing/

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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 30^th 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.

By Dan Krell
Copyright © 2018.

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