Does the stock market affect housing? News & Opinion

Does the Stock Market Affect Housing?


Over the last few days, it’s looked as if a trap door has been opened underneath stock markets around the world. Equities have fallen faster and further than they have in the last couple of years. It makes us wonder: does the stock market affect housing?

Since the stock and housing bust a decade ago, investors have really only seen this type of selling a couple of times – the Brexit vote and then again on the eve of the 2016 U.S. Election. Even then, that selling lasted literally overnight and was reversed and overtaken in a handful of days. Markets lull many of us to sleep with the false promise that they never go down. Indeed, there’s a generation of young investors – teenagers during the bust – who now have jobs, incomes, and families who have never seen prices materially fall. Likewise, if they’ve purchased homes, they’ve probably only seen the values increase. But a decade ago stocks and housing fell together – a lot. And now, because we love the tools that build stuff and markets are falling, many people are wondering how the stock market affects housing and construction.

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Risk Your Assets

Well, why don’t you ask us an easy question! That darkly humorous demotivational poster comes to mind: Economics is the science of explaining tomorrow why the predictions you made yesterday didn’t come true today. If the folks who spend their careers studying the dismal science have drastically different opinions, then what’s the value of another opinion from a “non-expert?” Well, we can throw a dart at the wall as well as anyone!

Now before any of us need to get talked off the ledge, it’s important to remember that price corrections in any risk assets – stocks, real estate, and now even cryptocurrencies – are normal. With prices constantly rising, it’s actually been the last decade or so that’s been abnormal. Markets normally have two sides, with some give and take whether they are trending higher or lower. Although those corrections can be unsettling, they are arguably good. Don’t we all like getting a good deal? Corrections give us the opportunity. It is rarely wise to buy something when it’s at its highest price. Sir John Templeton and Warren Buffet made fortunes buying during corrections.

Does the stock market affect housing?

But that still doesn’t get us to the real question. For those of us whose livelihood comes from construction, who’ve seen the seeming link between stocks and housing, is there a concern that stocks are selling off?

Gimme The Hard Stuff

Well, given that corrections are historically normal, we don’t think there’s a reason to worry unless stocks fall a lot further. This would signal more economic weakness than the run-of-the-mill correction (really!) that we’re seeing right now. However, economies ebb and flow, and we’re likely to see a mild slowdown this year. And we can’t say there’s a direct link between stocks and housing. It’s more likely that speculators in risk assets flock together. That is, investors seek a return across risk assets at the same time, so a correction in one asset class will likely happen in others, too.

With some of the froth coming out of stocks, one might be able to make the case that hard assets – real estate, homes, commodities – might even be a refuge for investors. Stocks can fall further and faster than things you can touch, walk on, live in, work in, etc. It’s likely that housing and construction will remain more stable than the stock of a company that allows us to send out squawks or chirps or just get mad at everyone we used to like.

Does the Stock Market Affect Housing? A Suspect and A Humble Theory

Speculative bubbles have appeared and popped for centuries. And people have always acted in their own self-interest. Still, it seems that bubbles have become more frequent and ferocious over the past couple of decades. We learned far too late that internet opinions are a dicey proposition, but here’s one that might actually bring us all together instead of dividing us.

If it’s true that bubbles have always appeared, people have always been self-interested, and bubbles are both bigger and more frequent, we can bring into the lineup the Federal Reserve as a suspect. As the Greenspan-Bernanke-Yellen (and perhaps now, Powell) Fed thought that every natural economic correction should be met with cheaper money, it created a world awash in low, no, or even negative interest rates. Since prudent savers could no longer expect a return by putting their savings in a bank, this money has sloshed around the world, frantically looking for a return – first in tech stocks, then in housing, then in oil, then (perhaps) in stocks generally, then most recently, in cryptocurrencies. Of course, some other bad policies aided the bubbles, too.

We must consider the possibility that interest rates might find a less bubble-friendly place to settle if they arrive through the billions of transactions occurring among millions of people instead of a handful of people in a room at the Eccles Building. We just might find that we wouldn’t have horror stories of jobs, retirement accounts, and home equity that we counted on vanishing into thin air.

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Bottom Line: Does the Stock Market Affect Housing?

It’s unlikely that there’s a direct connection between stocks and housing. That’s good news for those of us in construction as we see stock markets fall. Still, as confidence or insecurity in one area of the economy goes, so go the others. We have to remember that corrections, although rare over the last decade, are normal – and healthy. At the same time, we have to remember that corrections can adversely affect us and our neighbors. Economies don’t expand forever, so there’s likely a mild slowdown ahead. But if we keep our skills sharp and customers satisfied, we’ll be able to weather the storm.

Does the stock market affect housing? If you’ve been in the industry long enough to weather a couple of down markets, let us know what you’ve seen!

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As a guy who’s spent as much time in an office as on a job site over the years, I’d be less concerned about stocks and more concerned about bonds. While the stock market is nose-diving (and I agree with the author here that this so far looks like a normal correction rather than a reason for panic), 10-year bond rates have risen 10 basis points (that’s only 0.10%, but it’s still a lot). Mortgage rates are tied fairly closely to federal bond rates – bonds go up, interest rates on home loans go up. Rising interest rates mean borrowers… Read more »