For a long time, investors across different markets have often studied the relationship between the various markets in the financial world. The financial world is interconnected even though the dynamics in specific markets are different. When Wall Street declined abruptly in 2018, the effect was a sudden top in various indices across markets. This occurrence had many investors in the real estate market jittery. There is indeed a strong sense of uncertainty among investors in the real estate market when it comes to the shockwaves that come from volatility in the stock market. But should real estate investors worry about a potential housing bubble as a result of the stock market dynamics?
Let’s look at how the stock market and the real estate markets relate.
Interest Rates in the Real Estate Market
In the real estate market, investors can either buy housing units with cash or through mortgage loans. Most investors who do not have enough capital but want to invest end up getting loans that are facilitated by mortgage companies. All loans come with defined interest rates. This interest rate fluctuates depending on the influence of the stock market.
When there is low volatility in the stock market, mortgage loan lenders are more confident about their clients paying off the loans. They, therefore, offer loans with lower interest rates.
When the stock market is volatile though, the mortgage interest rates are high because lenders are not confident about repayment. High-interest rates end up reducing the demand for real estate and this, in turn, affects the property values. Experts reckon that even a 2% interest rate change is enough to affect investments in the markets. The stock market thus influences both the demand and value of real estate.
Bigger Down Payments
There is also a challenge of larger down payments in the real estate market when the stock market is volatile. Financial markets are all linked by the money flow in the economy. When the stock market is volatile, real estate mortgage lenders end up increasing the amount of down payment that they demand from their clients.
Real estate investors, however, are not attracted to the loans especially due to the higher interest rates. Investors then shift their focus from the lenders to getting equity from personal assets. But this also ultimately ends up being a challenge as the effects of the stock market are felt across the entire economy.
Lower Consumer Confidence
The stock market determines the level of confidence that consumers have in the real estate market. When the various indexes across the stock market are looking great, consumers are upbeat about the economy and they buy real estate units.
Investors are also more confident about buying property when the stock indexes are performing well. The overall confidence that comes as a result of a good economy thus translates across financial markets. When confidence in the market is low, however, buying and investing become risky and consumption goes low.
The decisions that consumers and investors make at different times thus affect the performance of the real estate market.
Is There a Possibility of a Housing Bubble?
Considering how the market has been for the past few years, investors are worried that there might be a housing bubble in the near future. According to experts, it is unlikely for there to be a housing bubble because the indicators are looking okay. A housing bubble occurs when there is a haphazard building of housing units without the consideration of market demand. Alternatively, a bubble can occur when buyers continue to buy units regardless of an increasing price rate.
As of now though, the stock market is looking good and the level of interest rates is acceptable. In case the properties available in the market are more than the demand, lenders will change policies so as to make the market competitive.
As evidenced by the various points above, the stock market has a powerful effect on the real estate market. The stock market is a great yardstick in the financial markets and all investors watch it and then determine how to proceed. The stock indexes might have dropped in recent years but there is still enough time to see a recovery. Anybody looking to invest in real estate will thus have to monitor the changes in the stock market to get an idea of how their investment is likely to be affected.