For better or worse, the stock market and the real estate industry are inextricably linked. Swings in the health of Wall Street can have serious impacts on home sales, lending rates, and other vitally important industry trends. The reverberations from changes in the U.S. stock market can be felt not only in America, but in major metropolitan areas and smaller regional corners of the world.
Here are the three ways the stock market impacts the real estate industry:
Credit
Given that most transactions are too large for average individuals to pay with cash, real estate investing generally relies on credit to make it possible for people to participate in the space. As a result, nearly every transaction that takes place in the housing market is subject to interest rates, which depend (at least partly) on the health of the stock market.
When questioning the trajectory of the stock market, people tend to evaluate risk- banks assess this factor and adjust their interest rates accordingly, as an example, and thus increase interest rates to compensate for market uncertainty. Meanwhile, banks are more inclined to reduce rates in the face of a healthy market outlook. Lower interest rates benefit real estate investors, as more people can afford to purchase a home that they otherwise would have hesitated on with higher rates.
Consumer Behavior
There’s no question about it- stock market performance influences consumer behavior. When the stock market is surging, average consumer confidence increases, and individuals are thus more likely to make real estate investments. Conversely, consumers are less likely to spend when the market is down. Real estate investors are less able to sell properties when people are less inclined to spend their money, and people often base their spending habits on the success of their portfolios.
Competition
The nature of competition is changed by declining confidence in the stock market- for instance, there may be fewer suitors in line for the same property. In such a climate, banks may also compete harder for one’s business, which has the potential to work to a buyer’s advantage. It can be difficult to quantify the degree to which competition plays a role in the real estate market, but for better or worse, it definitely serves as a significant factor to its level of activity and health.
Source: The Street