The Relationship Between the Real Estate Market and the Stock Market

It’s tempting to think of the economy as one common gigantic monolith, and we sometimes describe it in these terms. But in reality, our economy exists in many different niches and spaces, and the relationships between these niches are extremely complex and hard to understand.

When something happens in one sector of the economy, it may or may not influence other sectors of the economy. Figuring out these relationships and planning around them can make you a better, more successful investor. For example, you can use your knowledge of the stock market to make better real estate investments, and vice versa.

So what exactly happens to the real estate market when the stock market is in decline?

Learning From the Experts

First, you should always trust the advice of the experts you communicate with. It’s a good idea to talk to real estate agents, real estate investors, stock market investors, and similarly credentialed experts in these fields so you can get a better understanding of what’s going on and ultimately make better decisions for yourself. You can also work with a property management company, especially if you plan on acquiring and managing rental properties.

Hopefully, you’ll continue these conversations so you can glean more insights and wisdom and ultimately make your investing strategy even better.

The Relationship Between the Real Estate Market and the Stock Market

The relationship between the real estate market and the stock market is an inordinately complex one. There are many different factors to consider here, including:

·       Interest rates. The Federal Reserve sets and manages the target federal funds rate, which effectively dictates the rate at which member banks can borrow from the Federal Reserve. This, in turn, dictates the rates at which banks lend to consumers. When the stock market declines, the Federal Reserve typically slashes interest rates, hoping to stimulate the economy with cheap, easy money. This typically results in much lower mortgage interest rates, which prompts more consumers to invest in new properties. In many cases, this results in higher demand and therefore higher real estate prices.

·       Available capital. When the stock market declines, people typically lose capital. Their net worth decreases, and they may have less cash to work with. If you no longer have stocks to sell at high prices, you may not be able to raise the funds you need to purchase a new property. Accordingly, stock market declines can have a negative impact on real estate prices.

·       Shifting portfolios. Significant volatility can prompt people to rebalance their portfolios. As the stock market declines, some people want to buy in, hoping to take advantage of the low prices, but other people want to pull out and seek other investments to hedge their bets. Accordingly, this category can have a mixed influence on real estate.

·       Lower consumer optimism. More notably, significant stock market declines can result in consumer pessimism. When people don’t feel good about the economy overall, they’re much less likely to take big, risky actions like buying properties.

What Can Happen When the Stock Market Declines

Because of this mix of influences, several things can happen to the real estate market when the stock market declines:

·       Prices remain stable. It’s possible that prices remain stable. There are so many influencing factors pushing prices up and pushing prices down that they might fully cancel each other out.

·       Prices decrease. It could be that consumer pessimism and reduced capital influence real estate prices to sink.

·       Prices increase. It’s even possible for real estate prices to increase when the stock market declines. This is usually due to lower interest rates and shifting portfolios.

Variables to Consider

There are several variables to consider if you’re trying to figure out what’s going to happen to the real estate market during a stock market decline.

·       Scope and timing of stock market dynamics. A small, temporary decline is unlikely to move the real estate market in any direction. Prolonged bear markets are a totally different story.

·       Recent trends. People may also be influenced by more recent trends; for example, a small correction after a long bull run isn’t likely to make consumers abnormally pessimistic.

·       Local vs. national dynamics. Real estate markets often fluctuate based on local dynamics, more than national ones. This simply isn’t true of the stock market.

·       Your personal goals and risk tolerance. When making decisions related to this relationship, you also need to factor in your own personal goals and risk tolerance. How does the declining stock market affect you?

Although the stock market and real estate market are related, there isn’t a clear, one-to-one relationship between them. There are many complex interactions to understand if you want to play in your portfolio competently.

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