All Eyes on the Fed

How will rocky stocks — down another 2% in early trading today — affect the housing market?

My knee-jerk response is to cite Chinese leader Mao Zedong, who, when asked (in 1950), “What’s the significance of the French Revolution?,” responded, “it’s too soon too tell.”

So, if stocks quickly rebound in the next few days or even weeks . . . I see little effect.

But what if stocks enter a correction or even a bear market from here?

Then, I anticipate two consequences for housing:

One. Upper bracket housing will be affected disproportionately because of what economists call “the wealth effect.”

That’s because the stock market impacts the balance sheet(s) of upper bracket home buyers and sellers more than other strata.

If their wealth takes a hit . . . so does their purchasing power.

Two. Lower interest rates.

Called the “Fed Put,” the phenomenon refers to the Fed doing whatever it can to support the stock market when it experiences selling pressure.

The most obvious tool at the Fed’s disposal?

Short-term interest rates.

So, somewhat paradoxically, if the Fed steps in to support stocks with lower interest rates — assuming those also pull down mortgage rates — the effect could be to stimulate housing demand, at least in the short run.

P.S.: The wild card in all of the above is consumer confidence. If that takes a hit along with lower stocks, that’s obviously a negative for housing as well as the broader economy.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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