How The Current Stock Market Slump May Help Home Buyers
These days, the ongoing correction in the stock market has been on everyone’s lips. In a 24/7 news cycle, the subject has been competitive even with terrorist attacks and presidential races in terms of coverage. Everyone’s concern (or inclination to allay the concerns of others) and the amount of attention surrounding it is understandable, especially with the memories of 2008 still fresh in the minds of most Americans. While there are several factors behind the correction, chief among them the oversupply and nearly free-falling price of oil, the recent interest rate hike by the Fed, the slow-motion train wreck that is currently the Chinese economy, and political concerns both at home and abroad, none of them explicitly spell doom for the stock market or the economy as a whole. Unemployment remains low, new home construction – or housing starts – continue at their highest rate since 2008, wages have finally begun to enjoy a bit of long-awaited growth on pace with the recovering economy, and dirt-cheap gasoline has given consumers a sizeable windfall and by extension a huge boost to their confidence. While some of these economic conditions and the state of the stock market make real estate investment a little dicey for the professional investor, they’re simultaneously a huge boon to the homebuyer. If you’re thinking of purchasing a home in the next few years, now may be the time to make your move if you’re ready.
Obviously, the real estate market operates fairly independently of the stock market, and the two are equal components of the overall economy rather than demonstrating a definitive causal relationship. That said, a change in one often affects the other, but what we’re exploring here is the specific changes in the stock market that help homebuyers as they explore the option of purchasing a home rather than establishing causality between real estate and the stock market.
The Correlation Between Stock Market Value and Real Estate Prices
While there is little if any proof of a causal relationship between the stock market and real estate, history and common sense demonstrate an obvious positive correlation. This does not mean that lower stock values necessarily mean lower real estate prices, but the correlation is nonetheless there. As we saw in 2008, the stock market’s rise and subsequent crash was largely predicated on the sub-prime real estate bubble, built on inflated home prices and brought down by bad debt swaps when the bubble finally burst. As we all remember, that was catastrophic. However, housing has largely recovered in the past six years, with housing starts rising at a record rate and an appropriate increase in property values. As the stock market value declines, investors flock to the relative safety of bonds, which both increases their price and decreases their interest; the secondary effect is that it creates more competition in more tangible assets like real estate, which can work in buyers’ favor depending on the area. Changes like that could take years to reverse, and though it’s not the only thing liable to drive down real estate prices in the coming years, it’s still a contributing factor and to the specific benefit of the average or first-time homebuyer. If you plan to retain the home for 30+ years, now is a great time to take advantage of the current market.
Mortgage Rates: The Chinese Connection
You’re probably asking yourself what China has to do, if anything, with mortgage rates. We’ve already touched on the fact that China’s economic troubles are a huge factor in driving down the stock market’s overall value and, by extension, property values, but China exerts an even greater amount of influence on our own real estate market environment by forcing investors to flock to the relative safety of bonds. With so much money coming into the U.S. Treasury, mortgage rates have dipped for the second month in a row, hitting 3.92% this month. It’s also worth noting that China’s demand for commodities has plummeted, leading to an oversupply in the raw materials needed for construction, meaning that as homes continue to be built, the cost of doing so will inevitably come down, further feeding the already-increased supply of new homes.
Housing Starts, Increased Supply, and The Labor Market
Housing starts are already at a two-year high and the housing market is well on its way to a full recovery following the crash of 2008. Construction is robust, and the increased supply makes it a buyer’s market in some areas. While an eventual stock rally and strong hiring will inevitably put upward pressure on property values in the coming years, right now the environment strongly favors the home buyer and promises increased value over time. As we mentioned earlier, lower commodity prices drive down the cost of construction, and an increased supply of new homes will exert downward pressure on their prices in the short term, despite the fact that new building permits are on the decline. Because of the reduced number of new construction permits, it’s not just new home sales that are trending upwards; existing home sales are rising as well, no doubt due in part to the stronger labor market as millions of Americans reach a new level of economic security as they reach home-buying age, and favorable prospects for both buying and selling have encouraged some homeowners to upgrade to a new home, not to mention the increased confidence that Americans have these days in moving for work-related reasons.
Oil Prices
Finally, no analysis would be complete without at least an honorable mention going towards oil prices with respect to their effect on the real estate market. To be sure, oil’s current plunge is wreaking havoc on the stock market and eliciting a secondary effect on home prices, but we cannot ignore the huge windfall gained by consumers due to cheaper prices at the pump. The average family will save more than $800 this year due to lower fuel prices (more, when you factor in the mild winter and cheaper heating oil), and this amounts to an effective tax cut for consumers that they can spend elsewhere. The smart homebuyer will take advantage of these lower prices to invest in their future by purchasing a home, especially given that oil prices are expected to stay low until 2017. Iran is set to ramp up production in the wake of recently lifted sanctions, domestic shale and horizontal drilling has proven to be surprisingly resilient to lower prices and remains in production, the Saudis show no sign of reducing their output in an effort to retain market share, and China’s demand continues to shrink by the day. While Russia is assumed to be decreasing their own production, all the same, it’s estimated that there’s a global supply glut of over 1.6 million barrels per day of crude, and the reason we took the time to mention this is to highlight the near-certainty that prices at the pump will remain low for the foreseeable future. It should encourage consumers to take advantage of the savings while they can.
It’s no secret that real estate is a safer haven in a volatile market than stocks, as evidenced by the flood of investment into bond purchases recently. Investors want safety, and as a consumer you do as well, which is why real estate is not only favored by current conditions but also more secure as a result. Markets are fickle and unpredictable; tangible assets such as property will always be preferable, and though there are a lot of gloom-and-doom scenarios being tossed about, most of the contributing factors to the current market are actually favorable to consumers and homebuyers. So don’t fret too much, and if you’re in the market for a home, remember that now is a great time to make it happen. Be sure to check us out on Facebook and Twitter for more tips on real estate, investment, and market analyses!
– Get It Right Solutions LLC