How Does the Stock Market Affect the Real Estate Industry?

By : Nick Marr

Since the year began, investors have been pondering over the question: is the stock market on a bullish run? While it is challenging to accurately state what the stock market will look like in 2019, a few trends from 2018 give clues on what to expect.

According to the Investor’s Business Daily, stock market volatility dominated most of 2018. The market tolerated Treasury yield anxiety, Europe’s political spasms, a possible US-China trade tussle, and other risks. In December 2018, the Nasdaq and the Dow made steep declines and are still recovering up to now. A 2019 stock market forecast by Credit Suisse released in the same month cautioned that the stock market would experience more volatility in 2019. In addition, the report predicted higher borrowing costs.

There are various signs of slowing global economic growth as partly evidenced by the performance of the stock market. What does this mean for real estate investors?

There are various signs of slowing global economic growth as partly evidenced by the performance of the stock market. What does this mean for real estate investors?

Previous studies have shown that the stock market’s performance has implications on real estate. Here are 3 main ways in which the stock market affects the real estate industry.

1. Competition among banks for property buyers

During periods of stock market decline, the number of prospective property buyers decreases. There is a possibility that banks alter their lending policies to attract individuals who need financing for investment in real estate. This leads to the creation of a buyer’s market.

When the stock market is performing well, however, there are many property buyers searching for financing from banks. There is no need, therefore, for banks to offer competitive financing.

How should a property investor interpret this?

As an investor, you may find it easier to get financing for property investment when the stock market is declining. This is because banks are working harder to get your business. On the other hand, banks are not incentivized to offer competitive terms when the stock market is rising. During such times, you might have to look a little harder for property investment financing.

2. Stock market performance influences lending rates

Credit is perhaps one of the more direct points of interaction between the stock and real estate markets. Property investing heavily relies on credit since real estate is capital intensive and most investors do not use cash to pay for property investments.

Since these transactions are subject to interest rates, any business or economic factor that affects lending rates also has a direct impact on the real estate market. The health of the stock market is used by lenders to measure the general market risk and to adjust their interest rates.

When there is a lot of stock market volatility, banks typically increase lending interest rates to mirror the increase in market uncertainty. When there are good prospects for the health of the stock market, there is confidence in the market, which in turn implies lower perceived market risk. Banks are inclined to lower their interest rates and the costs of borrowing money reduce.

A real estate buyer should understand these interest rate dynamics to plan diligently on when to borrow for property investment. If you are a real estate seller, lower interest rates mean that more people can afford to buy a home, for instance. This implies that there are more buyers willing to purchase your property.

3. Stock market influences general consumer sentiment

In any economy, movements in stock market indices correlate with general consumer sentiment. Consumer optimism is experienced when major indices rise, while consumers tend to become more pessimistic when indices sink.

A consumer is more likely to consider an opportunity to purchase property if the stock market is booming. On the reverse, if the market is declining the consumer may hesitate to make a property purchase It’s clear that in either case (stock market rise or decline), the stock market affects decision-making by real estate consumers.

Portfolio diversification: the secret to success during periods of stock market volatility

Investment portfolio diversification enables an investor to reduce investment risk effectively and increase his long-term returns. If you a real estate investor who follows the stock markets for your property investment needs, you can diversify your portfolio with investments that are also affected by the stock market’s performance. A good example of a market you can venture into is Forex, and you can do this by having a Forex account.

Fluctuations in the stock market can give you insights to trade currencies and earn additional income. When a country’s stock market rises, foreign investors gain more confidence in that country’s growth and there is increased flow of funds to that country. This causes demand for the country’s currency to rise, which makes the currency comparatively stronger. Thus, following the stock market can offer many Forex account benefits while it also helps to you invest wisely in real estate.

In conclusion, the stock market significantly impacts the real estate industry. The health of the stock market determines property consumers’ sentiment, lending rates, and the intensity of banks’ competition for borrowers.