The impact may be more psychological than material, and when confidence is shaken, we turn to the stability of housing.
The stock market has been on a roller-coaster ride since late last week, with a historic one-day plunge in trading, and a ripple effect that struck the rest of the globe Tuesday. But most economists will tell you the historic highs over the past two years were bound to result in a correction of sorts as investors reckon with the possibility of inflation and rising interest rates.
Real estate professionals, and potential homebuyers and sellers, aren’t immune to the fears that reverberated across trading floors on Friday and again on Monday, but analysts say the effect on home prices, sales volume and lending activity will be minimal and temporary. Inman spoke to economists on Tuesday to sort out the facts from the falsehoods and what real estate professionals and homebuyers can expect from the housing market leading into what most believe will remain a choppy few days ahead.
Whoa! What just happened?
Since Friday, the Dow Jones Industrial Average — the price-weighted index of 30 large, publicly traded companies — slipped 1,800 points, or seven percent. Monday’s plunge, in fact, marked the steepest one-day point decline in history, but by the end of trading it had climbed back by 425 points, for a drop of about 4.6 percent. As of the time of this article’s publication on Tuesday at 12:40 pm ET, the Dow was up 237 points to 24,582.75.
Most analysts have chalked the dramatic decline up to worries over looming inflation, brought on by a rapidly accelerating economy, that, arguably, could prompt the Federal Reserve to raise interest rates sooner than expected.
Is this a correction? What’s a correction?
While the decline of 8.5 percent since an all-time high of 26,616 less than two weeks ago is dramatic indeed, the Dow Jones Industrial average, it’s worth remembering, was up approximately 26 percent between January 2017 and January 2018, so the drop is, well, a drop in the bucket, so to speak. As for a correction, that’s defined as a 10 percent plunge from the last market high, in this case, that Jan. 26 peak when the Dow Jones Industrial Average skyrocketed 223.92 points.
“Even with a stock market correction, it is still way ahead compared to what it had been two years ago,” said National Association of Realtors Chief Economist Lawrence Yun. “It’s been such a strong run up that it was inevitable there would be some kind of correction, but I think this is a healthy correction given the metrics of the stock market, so whether people view this as a correction or there is actual panic and has an impact on confidence it remains to be seen.”
How did the housing market react?
Realogy, Zillow, Redfin, News Corp, and Re/Max, each of which are publicly traded companies, posted modest losses between end of trading on Thursday and Monday’s close. But analysts predicted that the stability of real estate, as an asset, will lessen the losses.
“Back when the internet bubble burst in the year 2000, during that period, that’s when the housing market began to steadily rise,” said Yun. “That means that as people felt their financial assets to be very volatile, people were looking for more stable assets, which they perceived that real estate could provide.”
Will this affect prospective homebuyers?
In cities with thriving technology hubs, across California and in Austin, Texas; and Seattle, tumultuous trading could have a modest impact on housing prices, if at least temporarily, because so many employees at companies like Facebook, Microsoft, Apple and elsewhere are paid not only handsome salaries but through an array of stock options, said Yun.
New York, too, so heavily tied to Wall Street, could potentially experience a greater impact. Elsewhere, the effect could be less pronounced, especially since, historically, real estate has always been considered a more stable investment than the stock market. However, homebuyers may be wise to keep one eye on the bond market, which is more heavily tied to fluctuating mortgage rates.
Last year, the Fed began reducing the size of its $4.5 trillion asset portfolio, which includes $1.7 trillion in mortgage securities. Nela Richardson, chief economist at Redfin, said that, as a result, rates are expected to slowly increase over the course of 2018. They’ll remain historically low, but homebuyers may experience some hiccups as mortgage rates and bond prices adjust.
“Most of the attention the last couple of days has been on changes in the stock market, but homebuyers are more likely to feel the effects of changes in the bond market,” said Nela Richardson, chief economist at Redfin, in a statement to Inman News on Tuesday. “Long-term rates like mortgage rates are highly linked to treasury bonds. Bond prices have bounced up and down a bit the last few days as investors weigh whether to invest in safe assets like bonds or use the stock market correction as an opportunity to buy more stocks.”
But they’re scared, right?
Despite a strong economy, a bull market that’s been chugging along since 2009, unemployment at a 17-year low and historically low interest rates, the havoc of such a dramatic week of trading is bound to rattle even those among us who are typically unflinching. Lending some credence to those fears, the XIV index, widely known as the “fear gauge,” and designed to measure overall volatility in the market, shot up to its highest level since 2009. But to hear it from analysts — and to paraphrase Franklin Roosevelt — there’s nothing to fear but fear itself.
“It’s a psychological impact,” said Yun. “I think some people will basically think that a stock market correction is impending news about a potential economic recession. But the economy is doing very fine. I think even with the stock market correction of the past few days we are not facing any economic recession possibility. So the underlying economy is very strong, but some consumers may misinterpret that, so the stock market may portend a slower economy and some consumers may retrench, so it could be a hit on confidence. There could be hesitancy.”
Other experts agree that the stock market itself could drag down the rest of a thriving economy, but that’s only if the losses continue for some time.
“We should expect equity markets to be volatile – they are a relatively high risk asset prone to sharp movements,” said Zillow principal economist Aaron Terrazas in a statement emailed to Inman. “The recent stability is a historical anomaly. Traditionally, short-term volatility does not spill over into the real economy. If, however, the drop were to prove to be a longer-term phenomenon – lasting more than a couple weeks, then we could start to see people’s confidence in the economy start to slip, which would impact labor and housing markets.”
Is the worst of it over, or are we in store for more declines?
On Tuesday, the rest of the world experienced the ripple effect of yesterday’s tumultuous trading day. Investors in Tokyo, London, Frankfurt and Paris sent international stock markets plunging around 2.5 percent, and in several Asian markets — in Japan and in Hong Kong and Taiwan — shares were down around 5 percent. The international ripple effect, and the hectic trading early Tuesday in the United States in which the Dow Jones Industrial Average climbed more than 100 points, indicates there’s much more frenetic trading to come this week.