Macroeconomic variables, such as the stock market, building permits and housing starts, fluctuate in patterns that repeat themselves in predictable ways. As the economy pulls out of a recession, investors, anticipating increased home building, begin to buy construction-related stocks, fueling market movement. Rising stock market prices precede the renewal of the housing sector.
Stock Market and Housing
The housing and stock markets are interconnected in multiple ways. Major home builders’ shares are traded in the stock market. Home improvement companies tied to home building also trade on the stock exchange. The housing sector dips deep into the economy as furniture manufacturers, plumbers, electricians, landscapers and more are all dependent on housing. Housing starts and the stock market are both leading indicators of economic activity.
Consumer confidence is a major consideration when people purchase durable goods and real estate. Few people are likely to commit to a big mortgage payment if they feel that their economic future is uncertain. When the stock market retreats and the value of portfolios declines, investors are impacted psychologically. Even if the portfolios are in IRAs, which will not be touched for years, people’s confidence is shaken. Loss of confidence can spread like a virus, affecting others who have not been financially hurt but have nevertheless become unnerved by news surrounding the economy.
Funds for Home Mortgages
Down payments for real estate purchases have varied in the past, but following the housing crash that began in 2007, credit requirements tightened. Lenders began requiring larger down payments than they had before the housing bubble and crash. For some home buyers, the funds for their down payment comes from their stock portfolios. When the stock market slides, so does the net worth of investors. Without the necessary liquidity to make the down payments, home buyers are forced to defer their purchases. Rising stock prices restore portfolio values, creating the funds for home buying.
Real Estate in Portfolios
As the value of stock portfolios increases, investors may look to other investment instruments to diversify their holdings. Real estate is one alternative. Families will purchase second homes or lock in current prices and rates by purchasing property with the intent to build later. Investors will purchase rental homes. Conversely, if the stock market were to fall, it is likely that real estate prices would follow suit.
Courtesy of Thomas Metcalf, Demand Media