Each time the stock market plunges there’s speculation about a widespread economic contagion. Talking heads and news headlines predict doom and gloom, as well as speculate 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.
Consider the stock market corrections in 2015 and 2018, which 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 gross domestic produce (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.
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 during the second half of the year after an active spring and summer.
This week’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 National Association of Realtors (NAR) press release indicated that existing home sales are 2.2% 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 is for different reasons. Like then, home sale inventory is low and homebuyers 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 do not 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 homebuyers. However, July 17 NAR report indicated that foreign home buyers have been affected by a slowing global economy and low U.S. home sale inventory. The NAR Profile of International Transactions in U.S. Residential Real Estate 2019 indicated a 36% 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.
Dan Krell is a Realtor® with RE/MAX Success in Potomac, MD. You can access more information at www.DanKrell.com