Stock Market Implosion Threatens Real Estate Values
In recent weeks, major U.S. stock markets have lost between 16-26% of their value. A 20% loss in value is considered a bear market, so we have now entered that territory in the NASDAQ and are close with the Dow Jones and S&P 500. After nearly 10 years of a bull market, the longest in history, this reversal was bound to happen, but how will it impact local real estate values?
While the loss will have a noticeable effect on investors’ portfolios and a psychological impact on perceived wealth, it has been accompanied by a very welcome, approximately 3/8 of 1% drop in mortgage interest rates. This makes a significant impact on buying power and, with rates are sure to go up soon, this should increase demand in the short term. With this being the slower, holiday season, be prepared for an acceleration of demand in January, particularly if the stock markets stabilize.
While the portfolio losses are real, the economy is still technically strong with low unemployment and wage growth. Despite a rough few weeks, the Dow is still at levels seen as recently as the summer/fall 2017, so really not too long of a time period to become attached to that extra money (on paper). As the gains came so quickly, this 20% drop in investment value may not weed out too many buyers who now do not have enough funds. Additionally, as I have seen, with finite funds, buyers still buy, they just buy in different areas or less luxurious properties. If buyers have a stable job and are in the mindset to buy, they will probably still do so.
With equity sellers who are looking to sell in order to purchase their next place, this is actually a plus. With a higher percentage of the down payment to be used for the next purchase tied up in their current property rather than in the stock market, they should have an even less of a problem and should also benefit from the lower interest rates accompanied by the flight to treasury bonds that generally occurs in a stock market sell-off.
Unless this market downturn continues and becomes a prolonged event, leading to an economic slowdown and/or a drop in real estate values, I expect this will benefit the residential real estate market in general. This will especially be true in upper-end, but not elite markets like Playa Vista where people are not living paycheck to paycheck, but where very few have the benefit of substantial generational wealth. These buyers are influenced by markets, but not completely driven by or immune to them, and the ones more likely to influence them are working in their favor (e.g. interest rates). Now we just need the stock market to stabilize, but if it can, I will be looking forward to a busy January.