The stock market’s roller coaster ride continued Thursday with the DOW experiencing a 1,033 point decline, the second-worst point drop in history, eclipsed only by Monday’s 1,175-point nosedive. While the decline may not have been caused by “anything fundamental“, the historic one-day plunge on Monday, second on Thursday, and fear of inflation causing interest rates to rise faster than expected, real estate professionals, home-buyers, and sellers can’t help but ask ‘should I be concerned?’ Not necessarily, according to Jotham Sederstrom of inman News. “Analysts say the effect on home prices, sales volume and lending activity will be minimal and temporary” “The impact may be more psychological than material, and when confidence is shaken, we turn to the stability of housing.”
What are stocks and bonds, anyway?
Stocks and bonds are the two ways a company or entity can raise money for their needs. Simply put, stocks are ownership and bonds are debt. When a company needs cash and they sell a portion of company ownership in exchange for cash, they issue stock. When an entity borrows money on the public market with an agreement to pay interest, they issue a bond.
Why does the stock market affect real estate?
Eloquently explained by Zacks Investment Research:
“Mortgages make up a significant part of the bond market. The money that funds mortgage loans comes from investment in mortgage-backed bonds. When the bond market is doing well, yields and interest rates fall. When investors leave bonds, triggering a bond market sell-off, mortgage rates rise.” Assuming that stock and bond markets are competing for the same investment money, logic dictates that when one rises the other falls. This is why investors are told to diversify their accounts between the two. When the stock market rallies investors sell bonds to purchase stock. Conversely, when the stock market declines, bond yields (and therefore mortgage rates) will also decline encouraging more activity in real estate.
Should Albuquerque be worried?
According to National Association of Realtors Chief Economist, Lawrence Yun, the cities closely tied to Wall Street or those with booming technology hubs (like New York, California, Austin, Texas, and Seattle) may temporarily experience a modest impact on housing prices because so many employees at companies like Facebook, Microsoft, Apple and elsewhere are paid not only handsome salaries but through an array of stock options.
- Egan, Matt. (2018 Feb 6). Dow plunges 1,033 points and sinks into correction. CNN Money. Retrieved on Feb. 8, 2018 from http://money.cnn.com/2018/02/08/investing/dow-jones-stock-market/index.html
- Cox, Jeff. (2018 Feb 6). Why the stock market plunged Monday. CNBC. Retrieved on Feb. 8, 2018 from https://www.cnbc.com/2018/02/05/why-the-stock-market-plunged-today.html
- Sederstrom, Jotham. (2018 Feb 6). Should real estate fear the stock market tumble? inman. Retrieved on Feb. 8, 2018 from https://www.inman.com/2018/02/06/should-real-estate-fear-the-stock-market-tumble/?utm_source=inbrief&utm_medium=email&utm_campaign=inbrief&utm_content=20180206%2B%2BREADMORE%2B1
- Imbert, Fred & Gibbs, Alexandra. (2018 Feb 8). S&P closes lower in biggest reversal since February 2016 as rates pop. CNBC. Retrieved on Feb. 8, 2018 from https://www.cnbc.com/2018/02/07/us-stock-futures-dow-data-earnings-market-sell-off-and-politics-on-the-agenda.html
- Zacks Investment Research. The Correlation Between Mortgage Rates & the Stock Market. Zacks Investment Research. Retrieved on Feb. 8, 2018 from https://finance.zacks.com/correlation-between-mortgage-rates-stock-market-10350.html
- Kenny, Thomas. (updated 2017 July 2). Difference Between Stocks and Bonds. The Balance. Retrieved on Feb. 8, 2018 from https://www.thebalance.com/the-difference-between-stocks-and-bonds-417069
- Sederstrom, Jotham. (2018 Jan 30). Home prices climb 6.2 percent nationwide. inman. Retrieved on Feb. 8, 2018 from https://www.inman.com/2018/01/30/home-prices-climb-6-2-percent-nationwide/
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