How Stock Markets Affect Real Estate
Some variables in macroeconomics fluctuate in regular and often predictable patterns. These include the stock market, building permits, and housing starts. As an economy pulls out of a recession, for example, investors expecting home-building to increase will consequently begin to buy stocks related to construction. This will fuel the movement of the market upwards for the housing sector. Below, we discuss three ways how Wall Street’s swings in the volatile markets affect the cost of homes and other properties across the United States today.
- Credit
Investments in real estate depend heavily on loans from financial institutions. The transactions involved are of high volume, and as such most individuals cannot pay cash. Through credit, such individuals can get the chance to participate in the real estate industry. By taking on debt, they can make larger purchases in the hope that these will give them a significant return.
Since the housing sector depends so heavily on loans, its performance thereby correlates with prevailing interest rates. These rates are partly dependent on the fulfillment of the stock market. If there’s uncertainty in the stock exchange, banks try to cover up for the increased risk by raising their interest rates. The raising of these rates then makes borrowing higher sums more difficult for real estate developers. As such, they also increase the costs of their houses in a bid to maintain the same return they wanted.
However, banks are also obliged to reduce their interest rates in the wake of a well-performing economy and consequently, a stable stock market. As a result of lower interest rates, more people can access loans at lower prices which prompt more house purchases. As a result, the real estate market gets more customers which results in its growth.
- Consumer Behavior
The stock exchange directly influences how consumers function in the economy. In the wake of a growing stock market, consumer confidence rises. As a result, there is more money available, and investors seek to expand their portfolios. One of the ways they do this is by buying into the real estate market. When markets are weak, however, consumers tend to hold onto their capital. As such, the housing market suffers due to fewer customers.
- Presence of Competitors
The stock exchange is the overall representation of the opinion investors hold regarding the future of the companies within the market. Declining equity markets causes a decrease in demand for the stock of various companies. As such, the cost of these shares lowers and returns on the investment also suffer. As a result, fewer people are willing to buy properties. This causes property prices to be lower, and therefore, the buyer is placed at an advantage. Conversely, a more favorable market leads to increased competition which would result in higher costs for properties. This would eventually lead to an advantage for the real estate agency.
Additionally, the housing market is also affected by government policies and the state of the economy, which also affect prices in the stock exchange. Negative policies cause declines in the stock market which could result in lesser home purchases and vice versa.
