Could Recent Stock Market Drops Can Affect Real Estate Values?

Chris B Johnson, REALTOR® Neighborhood Market Report  Mortgage Pre Approval  Time To Buy A Home

Those that pay attention to the stock market know that things haven’t exactly been going well recently. Market crashes in Asian countries, especially China, have sent ripple effects towards the U.S.

The third week of August was the worst week in four years, and the Dow Jones industrial average went down 1,000 points on Monday, August 24th according to NBC News.

Some experts are noticing early signs of recession periods, such as former treasury secretary Lawrence Summers.

The percentage drops might be enough to get the attention of high profile investors, but the general economy doesn’t need to be as worried yet. The Monday 6.6 percent drop is nowhere near as bad as the 22 percent drop from the infamous Black Monday in 1987.

What does this mean for real estate? There are some good and bad things that can happen.

The Good

The best thing that a moderate market dive could do for real estate is keep the Federal Reserve from raising interest rates on mortgages.

bankrate graph

Source: Bankrate

That would help keep buyers in the market. Like the stock market, consumers are naturally more encouraged to buy while rates are low.

30 year mortgage interest rates were at a very low point around 3.73% in April 2015 and began rising to hit 4.2% in July. However, rates have started to go back down to around 3.8% in August, according to Bankrate.

Another important consideration is that when stocks start getting rocky, money-wise buyers start turning their heads towards the safer bets. Real estate is already seen as a conservative purchase, and may be seen as even more of a wise bet if stocks continue to plunge.

As long nationwide employment remains steady, interest rates stay affordable, and people see real estate as a smart investment, buyers will keep the real estate market afloat.

The Bad

Property Arrows

Low inventory and a healthy amount of buyers have created a seller’s market in the U.S. real estate market for the past 6 months to a year. Median home prices across all housing hit $236,400 in June 2015, topping a peak of $230,400 from nine years ago according to CBS News.

Basically, buyers have been confident to pull the trigger on housing recently.

The worst thing that could happen from a market downturn is a widespread psychological shift in buyer attitudes.

If buyers start thinking, “Well the market is tanking, I better hold on to my money,” then the real estate market will be in a really bad place reminiscent of 2008.

Zacks, a Wall Street research firm, states how important consumer confidence is, “Few people are likely to commit to a big mortgage payment if they feel that their economic future is uncertain. When the stock market retreats and the value of portfolios declines, investors are impacted psychologically.”

If buyers start holding on to their money, then sellers will either have to pull their homes from the market or start settling for less.

Our Advice

Keep moving along. It’s too early to start sounding the alarms for a housing recession.

The market may balance out between a buyers and sellers market. But inventory is still low enough for homeowners to confidently put their homes on the market with expectations of selling at a fair price or above (assuming you’ve set the price right).

There will still be enough buyers for the foreseeable future since interest rates are likely to stay low, or even go down, before they are going to rise anytime soon during stock market scares.

There may be some buyers that end up having less cash for closing due to the stock market. If you’ve chosen to work with a knowledgeable real estate agent, ask their advice on how to handle offers from such buyers. It’s also fine to consider lining up a backup offer just in case the buyer in escrow doesn’t have enough cash to close.

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Comment balloon 6 commentsChris B Johnson • January 16 2016 07:35AM

Comments

My bride and I have been discussing the market and what to do with our investments.  We're thinking of buying more real estate and stop investing in the stock market for a while.  Our financial guy won't like our thinking but we do what we feel is best for our future. 

Posted by John McCormack, AlbuquerqueHomes.com, Albuquerque Homes Realty (Albuquerque Homes Realty * www.AlbuquerqueHomes.com) over 2 years ago

I agree John McCormack , especially buying RE with low leverage as there will almost always be a need for rental units.

Posted by Chris B Johnson, 5 Star Rated REALTOR® Quality, Not Quantity (Allison James Elite) over 2 years ago

Chris,

We are hearing that apps for mortgages are up and our economy is doing well.  A

Posted by Ron and Alexandra Seigel, Luxury Real Estate Branding, Marketing & Strategy (Napa Consultants) over 2 years ago

Let's hope that 2016 is the best yet Ron and Alexandra Seigel !

Posted by Chris B Johnson, 5 Star Rated REALTOR® Quality, Not Quantity (Allison James Elite) over 2 years ago

Super post, I'm glad I came across it in the archives, Looking forward to others from you.

Posted by Winston Heverly, GRI, ABR, SFR, CDPE, CIAS, PA (Winston Realty, Inc.) over 2 years ago

Thank you Winston Heverly 

Posted by Chris B Johnson, 5 Star Rated REALTOR® Quality, Not Quantity (Allison James Elite) over 2 years ago

Participate