How Does The Stock Market Affect Real Estate?
The stock market is quite literally booming. News of it is everywhere, from talking heads on TV to sober, studious think pieces in economic journals. While it’s easy to get carried away by all the hype, many real estate investors and homeowners are asking themselves exactly how the stock market affects the real estate market and what role it should play in their decisions.
First off, let’s clear something up. While the stock market has a significant impact on the real estate industry, it’s not necessarily guaranteed to yield any more information on real estate than an analysis of the real estate market itself would.
In other words, while we’re about to explore some of these connections, which are both causal and correlative, the immediate conclusion a real estate investor should reach when confronted with a bull market should not be, “Time to invest heavily in real estate!”
Or at least, if it is time to invest in real estate, it should be for reasons much better thought out than high numbers on the stock exchange alone.
All that aside, the purpose of this article isn’t so much to point out signs in the stock market that may or may not prompt investors to act but instead to explore the deep and intrinsically complex relationship between the stock market and the housing sector.
The housing sector, in particular, leaves ripples quite deep in the economy as a whole since furniture manufacturers, plumbers, electricians, landscapers and more are all dependent on housing. Housing starts and the stock market are both leading indicators of economic activity, both singly and in tandem, so keep that in mind without leaping to the conclusion that the direction of the stock market automatically signals opportune times to invest in real estate (read: sometimes they do, but not as a hard-and-fast rule).
Major homebuilders’ shares are traded in the stock market. Commodities and raw materials used for construction are priced and speculated on in the stock market, while fuel prices and oil futures play a large role in most large industries besides real estate. Home improvement companies tied to home building also trade on the stock exchange.
By now, it should be clear that while it might not be the best idea to leap to real estate investment decisions based on the stock market, neither should we discount the relationship between the two specifically because they both comprise large and sometimes overlapping sections of the overall economy.
So how are the two related?
Real estate relies heavily on credit, and this represents the most significant connection between real estate and the stock market. Transactions are simply too large for average individuals to pay cash, and credit makes it possible for them to participate in the real estate industry. This is true of both your average homeowner and a real estate investor.
Nearly every transaction that takes place in the housing market is subject to interest rates. Properties purchased through credit have interest rates directly applied to their loan terms; while the price of raw materials used to build those properties (and to a lesser extent, the cost labor and specialized services) are indirectly affected by interest rates. Interest rates depend at least partly on the health of the stock market.
The stock market, at its core, is all about evaluating risk. Banks assess risk and adjust their interest rates accordingly. In other words, banks may increase interest rates to compensate for market uncertainty or the overall economic climate (which again, is measured in part by the stock market). As a result, borrowing money may cost consumers more (or less) today than it did yesterday.
Real estate investors benefit from lower interest rates, as more people can afford purchasing a home. Even if it means saving a few hundred dollars a year, lower interest rates can spur people to buy homes. As interest rates rise like they are today, though, buyers may be more hesitant.
Even then, that’s not the full story, and this is another example of why the stock market isn’t the be-all-end-all when it comes to real estate. Though interest rates are rising, mortgage rates hit a low a few months ago and have been slow to catch up, while inventories are extremely short in a competitive market that heavily favors sellers. Whatever buyer hesitation there may be in the face of rising interest rates may not be enough to cancel out high demand and short supply.
What we’re seeing, then, is that the stock market tends to reflect the nature of competition. When there are more suitors for a given property, banks may not compete as hard for the business of lenders and may not offer the same terms that they would in high-supply-low-demand situations. That ultimately works to the advantage of sellers. Of course, a less favorable market may do the reverse.
Finally, it’s worth pointing out that stock market performance both influences and reflects consumer behavior. When the stock market is doing well, as it is right now, consumer confidence rises and individuals are more likely to make real estate investments. When the market is down, consumers are less likely to spend. Whether it’s objectively a good idea for them to do either in each case, respectively, is another matter entirely.
For the real estate investor, who ultimately wants to sell their property, this nonetheless has an effect on their strategy. Again, for better or worse, the less confident consumers are based on the stock market, the less inclined they are to spend money. This means it’s less likely that real estate investors will be to sell properties.
The stock market has a powerful psychological effect on the economy in general, especially with our rapid-fire 24-hour news cycle. People often base their spending habits on the success of their portfolios, and consumers in general will still base their decisions on the state of the market even if they don’t have much stake in it. When portfolios are down, individuals are more likely to error on the side of caution, and save their money for a rainy day.
On the flip side, as the stock market improves – or reaches record highs as it did this week – consumer confidence rises accordingly. As their portfolios improve, people are more willing to invest in housing, which is good for real estate investors. Still, the final word should be the actual state of the real estate market.
Ultimately, your investment strategy should incorporate information and analyses on multiple fronts. You should be of the understanding that while there are large trends to be aware of in the market in general, they must be viewed within the context of their relationship to the real estate market. Likewise, those broader trends in the real estate market should be filtered through the lens of local realities and the state of the area in which you’re investing.
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- Get It Right Solutions