“You Can’t Live in Your Stock Portfolio”: What Falling Stocks Mean for the Housing Market

Beleaguered Shareholders:  “Stop the Merry Go Round, I Want to Get Off!”

Are gyrating, crashing stocks good or bad for the housing market?

Both.

In fact, I see three positives and negatives apiece emerging from the recent market carnage.

Positives

Here are the pluses (yes, pluses):

1. Weak equity markets forestall the Federal Reserve’s plan to raise interest rates.  The vast majority of home buyers finance their purchase.  Ergo, cheaper money = more buying power = stronger demand (technically, lower prices — but same effect).
2. “Thanks, but no thanks”:  as they say, you can’t live in your stock portfolio.  The market’s recent, wild ride undoubtedly is too much for some investors (especially those close to retirement).  Such folks might rationally now be expected to shift some of their assets to more stable and tangible uses.  It doesn’t get more tangible than real estate (which, thanks to market turmoil, is at least temporarily cheaper to buy due to low rates; see, positive #1).  Millennials, who already distrust stocks, are likely to see the ongoing volatility as just another reason to steer clear.
3. Currency devaluation is (usually) good for hard assets.  Since China devalued the Yuan two weeks ago, other countries have followed suit (Thailand, Vietnam, etc.)  If the U.S. joins the devaluation bandwagon, that’s good for hard assets such as real estate (why would the U.S. devalue?  To keeps its exports competitively priced).

Negatives

Now, the negatives:

1. If the market drop portends a drop in economic activity (or causes one), that’s bad for jobs, consumer purchasing power — and home sales.
2. The opposite of the wealth effect.  When people’s portfolios are flush they feel more confident and spend more.  When they’re under siege . . . the opposite.
3. General uncertainty.  Getting a Starbucks latte is a (very) short-term, trivial decision.  By contrast, buying a home is a major, long-term commitment.  Uncertainty undermines consumer confidence, which chills demand for housing.

Which set of factors — positive or negative — will predominate?

It likely comes down to individual circumstances.

To pick just one example:  home buyers able to buy between 2009-2012 got very good deals.

See also, “Bubble-Resistant, Not Bubble-Proof:  Why the Housing Market is More Stable Than the Stock Market.”