By Jonathan Smoke
It’s been a wild couple of weeks for the stock market—So how do these negative swings in stocks affect housing? Well, it all depends on the nature of the stock market declines.
Eight of the 12 worst months for stocks were in the midst of recessions. With the exception of the tech bubble bursting in March 2001, the recession-related stock market declines happened well after the economy was in the dumps, so the market correction itself was reflecting diminished growth expectations.
In those recessionary periods, hundreds of thousands of jobs were lost before and after the bad months for stocks. Unemployment worsened in all cases; consumer confidence declined in all but one. And as a result of poor economic conditions, the fundamental drivers for housing were weak and home sales also declined.
The remaining four worst months for stocks since 1950 have occurred in times of economic expansion. They were October and November 1987, when the Standard & Poor’s 500 declined 25% collectively; September 2001, after the U.S. terrorist attacks; and August 2011, when the U.S. was locked in political turmoil over the debt ceiling. These declines were market corrections—when valuations declined but the economy itself, and therefore housing fundamentals, were not affected.
In those cases, hundreds of thousands of jobs were created in the three months following the correction. Unemployment declined or remained flat. Consumer confidence rose in subsequent months in half of the cases, and in others consumer confidence declined. Home prices were not affected. But, in some cases the pace of home sales declined for a few months following the market corrections, probably because the decline in stock assets cut into some buyers’ funding. In 2014, 21% of buyers used the proceeds of a stock or bond sale or funds or loan against a 401(k) or IRA, according to the National Association of Realtors® Profile of Home Buyers and Sellers.
Therefore, we can assume that a portion of today’s buyers—potentially 20%—could postpone or delay a purchase decision in the next few months as a result of the recent stock declines.
We’re not yet seeing an immediate impact on aggregated traffic and activity that would indicate a shift in interest as a result of the stock market declines. It will take a few more days and weeks to see if a discernible pattern emerges that is distinct from the normal seasonal trend.
If demand does indeed decline from those affected by the loss in stock values, it might just be what the struggling would-be buyer needs to gain the upper hand in a market that so far this year has clearly favored sellers.
There is one more silver lining: Mortgage rates usually decline following major stock market declines as bonds’ values increase, driving down long-term rates. We’ve already seen 30-year rates pull back to below 4%. As we’ve said before, we fully expect mortgage rates to rise this year, so this could be the final opportunity to buy at historically low levels.
This isn’t a stock market correction reflecting an economic recession. We may see short-term declines in consumer confidence, pending home sales in August and September, and existing-home sales in the fall as a result of the stock market correction. But at the same time, the majority of would-be buyers who are not dependent on stocks for funds will benefit from today’s low mortgage rates and will likely find less competition on homes for sale this fall. Beyond the fall, the long-term context for the economy and housing is solid.