Almost 6 million homes were bought by homebuyers in the United States in 2020 alone. You might already be familiar with how the basics of buying and selling real estate work, but you might not know that the stock market can play quite a significant part. As a matter of fact, the impact of the stock market on real estate is more involved than you might expect.
The influence of these two factors has a lot to do with the prices of properties as well as the prices of other things on the stock market. But how does the stock market affect real estate, you might ask? How involved are these two factors in reality and what kind of changes can you see when one factor starts to change?
Keep reading and learn the answer to the question: how does the stock market affect real estate?
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Investing in real estate and the stock market
Investing in real estate is a very common thing that many people do, including professional and casual investors. After all, investing in real estate, in general, can be a very good idea if you’re looking to make a great return on your investment. Of course, this is only the case if the stock market is in good shape.
This is because there are good and bad times to be involved in real estate investing. In some periods of time, like at the moment, the housing market is in great shape. People are selling houses left and right and people are buying up properties as soon as they go up for sale.
These days, houses are going for a lot of money, especially in areas near cities and towns. In fact, due to inflation, houses are more expensive than they’ve ever been before. While this does affect the ability of many people to buy houses, houses are still selling like crazy due to the increased demand.
So, at the moment, despite the inflation, the housing market (and the stock market) are doing quite well. But there are times when both of these factors were less than ideal. Consider the economic crash of 2008, for example.
During this time, everything that had to do with finance and real estate was in a huge slump. This was a time in which the prices for houses dramatically dropped. Many of the houses were being sold for far less than what they were worth.
The details
Even so, many people didn’t want to buy real estate at the time, no matter how cheap it was, because the stock market was in such bad shape. The economic situation at the time was simply so bad that it would have been a bad idea to get involved with real estate (except for the wealthy who would be able to snatch up many properties for cheap).
Whatever the case, as you can see, there are good and bad times for people to get involved in real estate and the stock market. So, does the stock market affect real estate, and does the stock market crash affect real estate?
It certainly does. But what about the details? Knowing that the stock market affects real estate is one thing, but it is another thing to know exactly how the interaction works and what you can do about it.
The details are especially important to understand if you plan on getting involved with real estate investing for yourself. After all, investing in a piece of real estate is a big undertaking and it isn’t for those who don’t know how to carefully weigh their decisions and think about where their money is going.
The first thing you should understand is how the stock market might affect a mortgage.
The interaction between the stock market and a real estate mortgage
Suppose that you want to invest in a home. Homes these days (and in general) are very expensive. It is nearly impossible to buy a house with cash alone because very few people have that much money saved up.
For that reason, to ensure that buying a house is possible for most people, mortgages exist. A mortgage is nothing more than a loan that will help a person buy a house. When you, the borrower, agree to get a mortgage from a lender (such as a bank), you will receive a certain amount of money from this loan.
More than that, you will need to pay back the borrowed money in a certain amount of time. Usually, you’ll need to pay off the mortgage a little bit every month and the amount will vary depending on various factors such as how much you want to pay, the stock market, and so on. Mortgages usually take several years to pay off.
Some may only take 10 or 15 years while others may take 30 years or even longer. More often than not, the larger the mortgage is, the longer it will take to pay off. Once you pay off the mortgage, the property will be completely yours.
The problem with this is how the stock market can affect your mortgage. Many people don’t realize that the state of the stock market can indeed affect mortgages for properties. This is especially important to understand if you are a real estate investor and don’t necessarily plan to live in the property that you buy.
The first thing you need to understand is that mortgages have interest rates. You will need to pay a certain amount of interest in addition to the payments you are already paying on the money you borrowed.
What you need to know
Unfortunately, the stock market can have quite a large effect on these interest rates.
If you are a real estate investor, these interest rates can quickly ruin your initial investment plans and make it very difficult to make a good return on the property you decided to invest in. For example, if the stock market starts to fluctuate, your interest rates will likely change as well.
As an investor, the last thing you want is for your mortgage interest rates to start bobbing up and down in an unpredictable way. And the last thing you really want is for the interest rates to skyrocket. This would only make it more difficult to pay off the mortgage.
Not only that, it would take away from the return that you will get from the property if you decide to sell it at a later time. After all, such a large chunk of your money will be directed toward the mortgage and the interest rate for that mortgage that the resulting return from your investment wouldn’t be nearly as much as you originally thought.
Interest rate problems
This is bad news even if you aren’t a real estate investor. Even if you are just a regular person trying to buy a piece of property, changing interest rates for your mortgage can be a real pain to deal with if the stock market starts to make a turn for the worse. Mortgages already tend to take up a large chunk of a person’s earnings, and for those payments to increase even more would be even more difficult to deal with.
Unfortunately, there isn’t really anything you can do personally to fix this problem since most stock market problems are out of personal control. The best thing you can do is make sure that you make your real estate buying choices at the right time so you don’t have to run into problems like this.
For example, if you know that the stock market and the housing market are both in good shape and won’t make a turn for the worse in the foreseeable future, this would be a good time to buy up some real estate.
For example, suppose that the stock market is currently in a state of low volatility. This means that the stock market is stable and not changing very much. During this time, many real estate investors (and other types of investors) tend to be very confident in making investment choices because the stock market is in such a secure state.
Low and high stock market volatility
This is also a good time for non-investors to make some big purchases. If the stock market is not very volatile, most banks and other lenders will give out loans and mortgages with very low interest rates. As you imagine, this is a great deal to pounce upon no matter who you are.
With low interest rates, you can focus more on paying the mortgage itself rather than spending a huge chunk of your money on the interest rate. On the other hand, if the stock market is very volatile and changing quite a lot, interest rates will be very high since the stock market is in such an unstable position.
This, of course, would not be an ideal time to buy a piece of property. As long as you take these factors into consideration, it shouldn’t be too difficult to make the right decision.
Consumer confidence and the stock market
Consumer confidence and the stock market also are closely intertwined. Consumer confidence, as the name suggests, has to do with how confident a person is in regard to investing in or buying a piece of real estate. The stock market tends to greatly affect consumer confidence in a variety of ways.
For example, consider that the stock market is in great shape and quite stable. In this case, the housing market should also be in great shape. People will be eager to buy and invest in homes at ideal prices and they shouldn’t have to worry too much about interest rates or prices fluctuating.
This confidence should be able to persist for a long time, or at least as long as the stock market remains healthy and stable. But if the stock market starts to take a turn for the worse, then the entire attitude toward buying and investing in real estate will change completely.
Let us again consider what happened in 2008 during the stock market crash. The stock market took such a serious blow that the housing market also ended up in ruins. Many people lost their jobs during this time and the stock market was in a serious recession.
What to know
Because the stock market was in such a bad situation for so long, consumer confidence was virtually nonexistent in the realm of real estate buying and investing. For that reason, many houses went unsold for a very long time. This is true even if the houses were being sold for very cheap prices.
People at the time did not have the money or the means to buy up houses. More than that, people were not confident in their ability to get reasonable mortgages or get a return on their investment.
But over time, as the stock market started to improve, more and more people started to buy houses again and use them for investments.
This is a pretty clear picture of the interaction between real estate and the stock market. So, if you plan on buying or selling your house, always be sure you do so when the stock market is in good shape so you can get the best deal.
All about the stock market and real estate
The stock market and real estate are more closely intertwined than most people realize.
The stock market’s volatility, in particular, can determine a variety of factors such as consumer confidence, mortgage interest rates, the price of houses, and more. For that reason, you will want to have a close eye on the stock market if you plan on buying or selling any property.
If you’re interested in selling your house, check your property’s price with this home valuation tool and get multiple no-obligation offers.