Takeaways:
- Slumping stock market could put brakes on interest rate hikes.
- Real estate perceived as safe haven for investments when stocks falter.
- Biggest danger is when stock market woes portend deeper economic woes, which is bad for housing.
Every Saturday morning at Nate ’n Al of Beverly Hills Delicatessen, a group of older guys gather to gossip and chat about their families, their friends, politics and the economy. This past Saturday, the 1,000-point drop in the Dow Jones industrial average was a hot topic of discussion.
After chatting about the China effect and the rolling thunder in Europe, one fellow predicted, “This should be good for real estate, right? People move their money into property when stocks go bad.”
That is one popular theory of what happens when the stock market takes a $1.8 trillion hit — investors move to safety, and tangible assets like real estate can win the day.
Chadney Barcus
The Wall Street sell-off is “good for real estate,” said Chadney Barcus, who is a broker, consultant and agent trainer for Coldwell Banker. “Consumers are more comfortable with assets they own, especially in times of volatility and uncertainty,” she said.
That sentiment was echoed by luxury real estate agent Christopher, who said, “A stock market bash always helps real estate.”
But if the stock market slump is an omen for more difficult economic times ahead, real estate can get hurt. A stock market crash can give consumers goosebumps, and commerce generally slows if that happens, as people don’t make big bets on anything. Instead, they step back until the the dust settles.
Deals can fall out of escrow, and longer-term job growth can slow down. It is not a good trend if the U.S. economy is the last man standing as Europe struggles, Asia falters and the rest of the world scrambles to grow while China stops feeding their economies.
However, the timing for this stock slump could be fortuitous because the Federal Reserve is expected to push up interest rates sometime this fall. If stock market misery here and the economic doldrums globally makes the Fed uneasy about its expectations of economic growth, it might second-guess its call to raise rates.
Anthony Lamacchia
“No doubt this is good for us,” said real estate broker Anthony Lamacchia. “It will keep interest rates low and help pour more money into bonds instead. This, plus low oil prices, helps real estate.”
Christopher Palmer, an assistant professor of real estate at the University of California, Berkeley’s Haas School of Business, agrees. “When bond markets are flush with so much capital, investors ‘reach for yield’ and search for other investments, like real estate, that can offer a higher payout,” he said.
One of the worst housing market busts happened in tandem with the biggest stock sell-off since the Great Depression and triggered the beginning of the national recession in 2008.
The recovery from that economic tsunami was challenging for Wall Street, the housing industry and the entire country. The recession was caused by an overleveraged global economy, sparked by a collapse in the U.S. mortgage market as foreclosures escalated and debt woes mounted.
Psychology and confidence are important considerations when the stock market falters.
Wall Street research firm Zacks published a report that said, “Consumer confidence is a major consideration when people purchase durable goods and real estate. Few people are likely to commit to a big mortgage payment if they feel that their economic future is uncertain. When the stock market retreats and the value of portfolios declines, investors are impacted psychologically.”
The impact of economic volatility on real estate could vary by region, according to Palmer.
Christopher Palmer
“It very much depends on how sensitive that real estate is to local and global economic fluctuations,” he said. “Certain markets are absolutely used by foreign investors as a safe haven for their cash when their home markets are in trouble — think Chinese, Russian and Indian cash buyers driving up prices in Vancouver, London, New York and Palo Alto.”
Palmer also points out that “real estate with exposure to commodity markets (think land in the oil patch) is likely going to mirror bargain-basement oil prices. At the end of the day, real estate is all about location, location, location, and that makes it inherently riskier over a long time horizon than a diversified portfolio of stocks and bonds.”