With the coronavirus outbreak upending our lives, for the time being, we’ve witnessed a historic decline in the stock market.
Over the month of March 2020, the three major U.S. stock indices (NASDAQ, Dow Jones, and S&P 500) have lost over 35% of their value. It seems like every day there’s a 2,000-point fall and then a 1,000 point buy back the day after.
There’s no stability in the stock market now, and analysts are skeptical of whether it will return to normalcy any time soon.
So the question on your mind is “how does the stock market affect my home’s value?”
Let’s talk about it.
There is No Direct Correlation Between the Stock Market and the Real Estate Market
Note the keyword “direct”.
There really is no direct correlation between the markets. Stocks have nothing to do with real estate in terms of value.
When someone buys a share of stock, they’re purchasing a part of a company.
When someone buys real estate, they’re purchasing a parcel of land.
Often, you’ll see investors purchasing real estate because its less volatile (less likely to fluctuate) than the stock market. Real estate is used as protection.
But What About the 2008 Great Recession?
The stock market crashed in 2008 because of laid-back lending practices among mortgage brokers and overeager builders who constructed homes that wouldn’t sell.
Once people began to default on mortgage loans and enter foreclosure due to rising prices, banking reserves began souring up, causing bankruptcies. Thus, shattering the stock market.
The crisis in 2008 was due to speculation in lending markets and a fundamentally flawed financial system. Not because the housing market is directly connected to stocks.
There Are Indirect Correlations Between the Stock Market and the Real Estate Market
Despite the two markets not being linked together, there are indirect factors that can loosely entangle them.
Interest rates influence lending practices, which can create a ripple effect on the rest of the economy.
If the stock market begins to fall, it might be due to a federal interest hike. The federal government sets what’s called a “discount rate” for depository institutions.
In basic terms, it’s the government lending money to banks so that they can continue to grow.
Obviously, when the Fed’s rate is increased, the banks begin to pay higher interest on loans, which creates an economic ripple.
The infographic below walks you through the ripple.
How does this affect real estate?
If interest rates are higher, it means mortgage rates are higher. As a buyer, you’re less willing to purchase a home because you’d be paying a lot more per month in mortgage payments than you would otherwise.
People during times of financial crisis are also less willing to make purchases to protect their wealth. This is also called “consumer confidence”.
The Role of Consumer Confidence
Consumer confidence is one of the most important factors in maintaining a healthy economy.
Economics is based on the consumer. Businesses don’t survive if the consumer doesn’t purchase their goods or services.
Therefore, if you have an economy where the consumer is wary about their finances, then they won’t be making as many purchases as they once were.
Discretionary purchases will be the first to go, but then larger purchases, such as real estate, will be next.
If a buyer purchases a home during economic stagnation or a declining stock market, then they’re going to feel as if their home’s value will decrease along with it and they’ll lose money.
The simple fact that the stock market is constantly in our face causes highs or lows in consumer confidence for all sectors of the economy.
What’s Going to Happen in 2020?
You cannot predict the stock market or the real estate market, no matter how many signals, events, and statistics we can come up with.
However, I think due to the nature of the current economic problem being caused by an external factor and not an internal flaw, the stock market should rebound once the coronavirus is controlled.
With that being said, I wouldn’t expect the real estate market to be affected as much as it could be in other situations.
With the coronavirus going around, I think homeowners and buyers are simply holding their ground until we have more answers.
A bigger issue affecting the real estate market is the oil price war between Saudi Arabia and Russia. That situation could cause a lot of real estate damage in oil-producing states.
Let me know what you think about the current situation we’re facing.
Overall, just because the stock market is suffering, it doesn’t mean real estate will. Regardless, I’m watching very closely for changes in the market and will let you know if anything drastic happens.