How does the stock market affect real estate? Is there any correlation between the two? When the real estate bubble popped in 2008, the world was shown how the real estate market could affect the stock market—but does that effect work the opposite way, too?
Market fluctuation in the stock market can set off various behaviors and actions that indirectly influence how people buy or sell a home. While there are no direct links between stocks and real estate, there’s still a possibility that significant fluctuation in either market can influence the other’s behavior.
Now, sure—comparing the stock market to the housing market is a little bit apples to oranges. Real estate isn’t stocks. At the same time, speculation exists over prices in the real estate industry; just like stock price speculation, residential and commercial property serves fundamental, tangible functions. You live in your home, so you experience its real value every day, not to mention equity. Store owners experience the actual value of commercial real estate. Property itself has real, tangible value.
Stocks, on the other hand, have ascribed intangible value. Investors buy and sell based on concrete (such as earnings reports) and potential (as in analysts’ recommendations) value.
So, how does the stock market affect real estate?
Factors affecting the stock market
Individual company performance can vary within the stock market. Analyst ratings, news reports, and acquisition announcements all play a role. Outside influences can affect both individual stocks and the overall stock market, such as:
- Political developments
- Disasters, both natural and artificial
- Psychology of the market
This isn’t an exhaustive list of influences, but these can be the most important to review.
When you think of the economy as a whole—macroeconomically—factors like interest rates and inflation can affect the stock market. But how does the stock market affect real estate? Growth or stagnation in the economy is an indicator of economic health—economic growth can move the stock market into bullish territory. In contrast, stagnation, economic downturns, and growing unemployment rates signify a bear market.
When interest rates decline, the stock market often moves higher—lower interest rates mean the economy grows. On the other hand, when inflation begins to rise, so do interest rates, which marks the beginning of an economic slowdown.
As unemployment ticks up, the economy’s growth is in a downturn. Investors know that economic growth is right around the corner when unemployment rates begin falling. As this data is reported, it can move stocks. If investors expect these movements, however, there is little change. At the same time, it’s still important to monitor these numbers. Doing so can help you predict — though not with 100% accuracy every time—whether the stock market will tick up or down.
Investors sometimes believe that whether the Democrat or Republican party holds power, it can be a benefit or a disadvantage, thereby having the ability to move the stock market. If the United States—or even the world — is in turmoil, this especially holds water. If so, then how does the stock market affect real estate? While domestic events certainly color the market, significant events in other countries can also affect the US markets. For instance, if the government of one of our trading partners or allies votes in a rather hostile leader, it can push the US markets lower.
But the opposite is true, too. If one of our partners elects a friendly leader, it can move US markets higher, such as when an ally country is a democracy. If a country is not a democracy, the likelihood of coups or strikes rises.
All in all, positive and negative effects depend on the circumstances—but, ultimately, any uncertainty and the US markets tend to see a downturn.
Both natural disasters and artificial or man-made causes can affect the economy, which can affect the stock market. For instance, if an earthquake were to occur in Silicon Valley, markets could drop significantly because investors could see this negatively impacting the economy.
On the other hand, an unnatural disaster can also have similar effects. If a company or facility with importance to the economy, such as an oil company, experiences a disaster—think refineries are exploding, or an epic oil spill—stocks can drastically drop.
Psychology of the market
All outside influences aside, stock market swings are ultimately caused by one thing—humans. A booming bull market happens, and everyone, even non-investors, is ready to buy. A looming bear market? Everyone’s more than prepared to sell off every share they own.
Factors affecting the housing market
How does the stock market affect real estate, then? While there’s no definitive connection between the stock market and the housing market, there are some indirect connections and subsequent effects, such as:
- Influence of current interest rates.
- Psychology of consumer sentiment.
- Psychology of consumer behavior.
So, how is the real estate market affected, exactly?
The influence of current interest rates
Property investors often consider rental properties or flipping houses, but the first step is figuring out how much the purchase will cost. Buying a home is a considerable investment, and most investors don’t have that much cash to make a purchase outright. These real estate investors then turn to a lending institution to get the funding to begin investing in real estate.
A mortgage loan has an interest rate attached. These interest rates make up a vast portion of the entire investment. Market fluctuations can negatively—or positively—affect your overall portfolio and investment income, making “how does the stock market affect real estate” a somewhat moot point. Buyer confidence and the economy’s health are primary influences on the current mortgage interest rate, and both are also inextricably linked to stock market performance.
The psychology of consumer sentiment
When consumers and investors alike aren’t confident in the current economic climate—or their future financial standing—they’re much less likely to buy or invest in a home.
If stock indexes are bullish, even just healthy, real estate investors are more likely to put some skin in the game. Usually, real estate investors only buy investment properties if the extensive stock indexes rise. This raises consumer confidence—investors feel good about building their financial future.
When the major indexes start falling, investors lose this confidence. Buying investment properties then poses a risk—one they may not feel comfortable taking. Purchasing investment properties when indexes are declining could saddle an investor with liabilities rather than income-returning assets.
For instance, even if you found some inexpensive properties, a declining stock market might dissuade you from the purchase. Sometimes, it’s better to wait and evaluate your options and future stock market fluctuations before making any down payments.
Plus, market fluctuations can affect the seller, too. Declining buyer demand for housing means sellers have to lower their prices. At the same time, this can make it easier to buy, but still a risk from an investment standpoint—especially if the stock market is experiencing high volatility.
And finally, you also have to consider a higher interest rate on a mortgage and a potentially much larger down payment. Putting all your hopes into the equity you can build suddenly has a lot less potential. All the above together could affect real estate market performance.
The psychology of consumer behavior
Which came first, chicken or egg? It’s the same with this seeming correlation between the stock and housing markets. Does the stock market affect the housing market? Does the housing market affect the stock market? Stock market performance impacts consumer behavior. Consumer behavior generally factors into whether real estate investment changes translate to stock market fluctuations.
When the stock market is riding high, consumers are more apt to take the chance on a real estate investment—when the market is in decline, consumer spending also goes down. When the market begins heading into bearish territory, people don’t spend nearly as readily as when the markets are soaring, which means investors probably won’t be selling any properties they already own either. This becomes a cycle of caution and saving cash for the future.
How does the stock market affect real estate?
For better or worse, any changes in the stock market influence the real estate market’s performance—all facets of the real estate market, from buyer perception to lending behavior and planning. Any changes in the above become more than evident any time the stock market fluctuates.
In the end, real estate investors watch the stock market. As they put together information about upswings, downturns, and overall stability, investors decide if buying or investing in properties is beneficial at that time.
The US stock indexes have dropped significantly in the last few years, but this doesn’t necessarily translate into a ruined housing market. Investors always hope stocks will recover before it damages the real estate industry too much. Plenty of online tools can help you find lucrative investment opportunities even when market fluctuations look like they’re heading into the red.
The chart below shows a snapshot of the US Real Estate Index for October 2021 through April 2022.
Image source (Image credit to Barchart.com)
And this next chart shows the S&P 500 SPDR Index fund for the same period, from October 2021 through April 2022.
Image source (Credit to Barchart.com)
It’s curious—these two charts seem to show nearly identical movements! On closer examination, this illustrates a sort of dance between stocks and real estate—an ever so slight “when you drop, I drop; when you rise, I rise” type of relationship. In October 2021, the US Real Estate Index was just over $400. The S&P 500 was a little over $435. By the end of December, the real estate index had reached its highest point of this 6-month period at just below $455, and the S&P 500’s highest point was in the first week of January 2022 at just below $480. Both indexes began dropping in late January as tensions grew between Russia and Ukraine, and both indexes dropped to their lowest points in mid-February.
The most interesting aspect of this “dance” between these two indexes is that the US Real Estate Index always moves just before the S&P 500 SPDR. So, how does the stock market affect real estate? It appears, perhaps, that the market fluctuation illustration above says just the opposite—maybe the real estate market affects the stock market? Or maybe these two markets are really as intertwined as the charts suggest.
No matter what, this relationship dance wouldn’t exist as it does without other factors, such as interest rates, inflation, overall consumer sentiment, and even political tensions abroad being at play, as evidenced above. As inflation continues to rise and the price of everything from fuel to food continues skyward, so, too, are home prices. Whether the continued increase in home prices is sustainable remains to be seen.
Staying abreast of what’s happening in the stock market is essential for all investors. You probably also already pay attention to the real estate market, watching interest and mortgage rates, and weighing consumer confidence, behavior, and current home prices—keeping tabs on these two markets isn’t much different. You can stay updated on trends, bulls, and bears and see if those market fluctuations influence your feelings about the housing market. If you’ve never done this before, it’s a great way to help you learn the ropes of portfolio diversification and aim for better returns in the future.