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., where rising interest rate expectations have also depressed stock prices. So how does the stock market affect real estate?
The third week of August was the worst 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.
As in August 1997, 1998, 2007 and 2008 we could be in the early stage of a very serious situation.
— Lawrence H. Summers (@LHSummers) August 24, 2015
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? Some good and bad things can happen.
How Does The Stock Market Affect Real Estate? The Good
The best thing that a moderate market dive could do for real estate keeps the Federal Reserve from raising interest rates on mortgages.
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 as 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.
How Does The Stock Market Affect Real Estate? The Bad
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.
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.
Buying: Make Sure You Can Afford a Home
Before you look at homes, you need to know whether you can actually afford to own one regardless of the stock market. Mortgage payments are generally higher than rent in most states. And even when the prices are close, there are other costs associated with owning your home instead of renting.
Your property taxes will be added to your monthly mortgage payment. And if you put down less than 20% for a down payment, your lender will probably require you to pay for private mortgage insurance (PMI) as well.
You’ll also have to pay some costs that you might not have had to pay while renting: utilities, cable, garbage pickup, and any necessary repairs.
Make sure you can comfortably afford not just your mortgage but also any additional expenses before buying your first home.
If you’ve run the numbers and decided that yes, you can afford homeownership, your next step is to meet with a mortgage lender. You can discuss the different types of mortgages and decide which would be best for you. You’ll also want to be pre-approved for a mortgage before you begin house-hunting.
To get pre-approved for a mortgage, you’ll have to share your financial and employment information with the lender. They’ll require documentation such as tax forms, pay stubs, and more. Once they review and verify your information, they’ll determine whether to approve you for a mortgage. If they do, they’ll let you know your mortgage options and terms.
The lender will also issue a pre-approval letter. You can show this to sellers when you’re looking at homes, to let them know that you’re able to secure financing.
Be Prepared to Negotiate
If the stock market is up and everyone is flush with cash, it’s more than likely that the seller will come back to you with a counteroffer because they’ll have more leverage. That’s just part of the negotiations. It’s up to you whether you can comfortably accept their counter, respond with your own counteroffer, or walk away.
Keep your finances in mind and don’t let yourself get carried away in the excitement of buying your first home. No matter how much you might think a house is perfect for you, if you can’t comfortably afford it, it’s time to think twice.
Remember buyers: you need to know what a home will require in order for it to be up to your expectations of build quality. Houses may need a few things fixed either prior to purchasing a home or immediately after. It’s important to be aware of these issues, as it may cause a headache further down the road after you’ve purchased the house.
Often, if the seller is motivated enough to sell the house, they might work with you and include fixes and light renovations as a stipulation in the contract for the sale of the house. Making sure you have inspectors and independent contractors to inspect the house for any major issues can help save you a headache in the long run.
You also need to be aware of the market surrounding the house. If you look around at the neighborhoods close to the home you’re considering, you may find other locations that may be a better price, closer to an important location, or simply newer than the one that you’re considering. Ensuring that you’re aware of the area and not focused on one house can help make sure that you’re making the best choice possible when putting in an offer, and not necessarily choosing the first one on the list.
Ensure you don’t bid either too high or too low on the house. Bidding too high will probably get you the house quicker, but you may end up paying over market value for the home and will probably have to recoup that cost before you can be in a suitable position to generate equity into the home.
Offer too little and the buyer may outright refuse and will greatly decrease your chances of landing the home that you want to purchase. When in doubt, consult a professional Realtor who knows the market.
How Does The Stock Market Affect Real Estate? 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 buyer’s and seller’s 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.
Above all, remember that your Realtor should be there to aid in your home buying process, not just to show you listings. Helping you avoid the wrong time to buy, the wrong location or the wrong house for your budget can all go a long, long way in making sure that you’re happy with the end result. Beyond that, realtors aren’t all the same, and you will need to find one that gels with your interest as a home buyer before choosing to go the length of the field with them.
UpNest, which is owned by parent company Realtor.com, uses a proprietary agent matching system that considers closed listings, location of listing, and other factors to provide the customer with 3-5 individual proposals.
The proposal includes commission information, marketing techniques, a Q&A about the agents, local trends, reviews, and more. Once agents start using UpNest’s platform, the matching system evaluates their performance with UpNest, including conversion rates and response time.