The performance of the stock market has a significant impact on the real estate industry.
Wall Street's swings can determine lending rates, home sales and other industry trends. The stock market's reach can even be felt in major metropolitan areas and smaller regional corners of the world.
Consider the three areas below:
Real estate investing relies heavily on credit. Transactions are simply too large for average individuals to pay cash. Credit makes it possible for them to participate in the real estate industry.
Americans take on debt so they can afford larger purchases.
Nearly every transaction that takes place in the housing market is subject to interest rates. Interest rates depend at least partly on the health of the stock market. In the event of a downturn, for example, uncertainty becomes more prevalent.
When people question the trajectory of the stock market, they evaluate risk. Banks assess risk and adjust their interest rates accordingly. In other words, banks may increase interest rates to compensate for market uncertainty. It's their way of protecting themselves. A result: Borrowing money may cost consumers more today than it did yesterday.
On the other hand, banks are more inclined to reduce rates in the face of a healthy market outlook. Confidence in the stock market enables institutional lenders to reduce their rates behind encouraging trends. The lower the risk, the more comfortable banks are with lending at lower rates.
Real estate investors benefit from lower interest rates, as more people can afford purchasing a home. Even if it means saving a few hundred dollars a year, lower interest rates, like current ones, can spur people to buy a homes that they might otherwise have hesitated on.
Even the threat of increasing interest rates may encourage consumers to push forward on a purchase. It could be some time before we see a combination of today's interest rates and home prices again, even after last week's rate hike.
The rate increase was good news for the country's largest banks, including major lenders JPMorgan Chase, Bank of America, Citigroup and Wells Fargo. The stocks for each of these banks should outpace the rest of the market. Even smaller, regional banks stand to benefit from the increase.
2. Consumer Behavior
Stock market performance influences consumer behavior. When the stock market is going well, consumer confidence rises and individuals are more likely to make real estate investments. When the market is down, consumers are less likely to spend.
The less inclined people are to spend money, the less likely real estate investors may be to sell properties. People often base their spending habits on the success of their portfolios. When portfolios are down, individuals are more likely to error on the side of caution, and save their money for a rainy day.
Declining confidence in the stock market changes the nature of competition. There may be fewer suitors for the same property. Banks may compete harder for your business. That can work to a buyer's advantage. Of course, a more favorable market may do the reverse.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.