When someone is investing their money or planning to invest it for at least some time, they usually look at the options of buying real estate or stocks. Some might choose to concentrate on either the housing market or on buying stocks while others choose to diversify their investment and opt to have an income stream from both sides.
Both choices are good enough; they’ll help to keep your money in a secure place for the long run and will also give the chances of getting an alternative (or main) source of income. They also come with their fair share of risks, though. But the general pros and cons of each choice are quite different.
However, this doesn't mean that your income from your real estate investments isn’t linked to the stock market. In fact, if a stock market is highly volatile, property investors are even more interested in knowing how that affects housing markets and real estate markets.
A decline or rise in the stock market generally causes upheaval for any kind of investor, whether they’ve bought any stocks or not. The major stock indexes have a direct or indirect effect on most industries, including the housing market. So, a significant change could either be exciting or concerning.
After a sharp and sudden decline in the stock market, for instance, real estate investors might be concerned about whether they should be selling off their properties. Buyers might also be worrying about how they’ve missed out on finding decent investment properties and buying them up.
If you’re a property or real estate investor, it might be best to brush up on how the stock market affects your investments.
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How the Stock Market Affects Real Estate Investments
Here are a few factors to be aware of for the future so that the home prices and interest rates don’t confuse investors:
Influencing Interest Rates for Mortgage Loans
When a property investor is considering a rental property for purchase, the first step is to consider how they’d cover the prices. Home prices are usually very high. So, not every investor has the ready cash to pay it all upfront. However, they can always apply to get external help through lenders and begin real estate investing.
Of course, loans usually come with interest rates. When mortgage rates are a large part of your real estate investment, having them go up and down can really affect your portfolio and income streams. Buyers’ confidence and the economy’s health are two major influences of mortgage interest rates, both of which are directly linked to the stock market.
Stock market with low volatility
When the stock market is not very volatile, home buyers will probably be able to find lower interest rates from lenders. This is because the home buyers will have higher confidence regarding repayment of the loan. But it might not be a good idea either because the stock market carries uncertainty.
Stock market with high volatility
With a highly volatile stock market, however, buyers who want to purchase housing will not be very certain or confident about their ability to make payments on their mortgage. The housing market will naturally suffer as a result.
Most leaders want to know the reliability of buyers seeking any kind of loan. This is why they bump up their lending interest rates; they accommodate that risk when most buyers are going through financial issues.
We now know that mortgage interest rates go up when the stock market drops. This phenomenon means that there will be fewer investors in the housing market who can become buyers for rental properties. The demand for any real estate will go down as a result. Indirectly, all this will have an indirect effect on the appreciation of real estate. With decreased demand, property values will drop.
Here, buyers have to stay aware that the occurrence of slow appreciation might not always be a negative one. It means that housing prices might drop, especially if they were previously too high for most buyers. With this drop, more investors will be able to buy some properties with the ready cash they have. They can then rent out this real estate and start making profits in the market.
Down Payments
Property buyers usually have to pay a down payment before they can take control of any real estate. The usual request is 20 percent of the housing or land purchase price at the moment.
When the economy and stock market drop, however, property buyers might face some obstacles in covering down payments. This occurs because the down payments will grow larger if anyone wants to get approval for a mortgage loan.
A mortgage loan might be an option but taking one out isn’t really a good idea if the interest rates are high.
Some investors might find a way out by gaining equity through their own assets and getting the cash with that method. Still, the stock market might also have an effect on this situation. With a declining economy and stock market, property values will be dropping. This means that the average buyer will find it quite difficult and challenging to get enough equity for the purchase of investment properties.
Then again, a healthy economy and a booming stock market will have the opposite effect. With stable and relatively low interest rates, down payments are also likely to be of the standard amount. This will allow potential home buyers and investors to make plans about the future and perhaps even gather together enough cash to make a full payment.
Consumer Confidence
When consumers aren’t too confident in their current or future financial situation, they’re not likely to become home buyers or investors.
When stock indexes are healthy, investors in real estate are also more likely to buy homes. For the most part, investors in real estate are only looking to purchase investment properties when the major stock indexes are on their rise. This means that their consumer confidence is increasing and they feel fine about building a decent financial future.
On the other hand, there’s always the risk of the stock indexes falling and real estate investors become less confident. This situation means that buying property will be a risk. No matter what the home prices are like, buying one could mean that you’re saddled with a liability and not an income-earning asset.
Even if you could find some very cheap mobile homes for sale, a weakening stock market might not encourage such a purchase. It might be best to wait and see how things go before putting down any payments.
What's more, the changes in stock market indexes affect property sellers as well. With the lower demand in the housing market, sellers will have to lower home prices. This will make buying one’s own house easier. But investing in a highly volatile stock market is still risky.
One also has to consider the higher interest rates for mortgages as well as the bigger down payments. Relying on equity will also have less potential. So, buying any rental property could be tough. All of this might affect the overall performance of the real estate market.
The Possibility of a Housing Bubble
One of the foremost concerns for property investors is the possible emergence of something called a housing bubble in the foreseeable future. This bubble occurs when the building of homes is going on irrationally, in spite of demand going down.
Another possible situation is that home prices go up, yet buyers continue to purchase real estate. They do this with the plan to build up equity quickly.
Even with the increased interest rates, property buyers might not have to despair just yet. The amount of properties that are available for sale might outstrip the number of potential buyers within the real estate market. However, it’s still possible that lenders could change their policies to offer financing terms on a competitive basis. These competitive rates and terms will serve to attract more buyers and enable them to start investing.
Another factor to consider is that certain investors in the stock market might start looking over their investment portfolio and evaluating them in the light of a highly volatile stock market. If the investors are bear-ish, which means that they’re optimistic, they might opt for investing in real estate for the security, and thereby, increase their income. This step would mean an increased competition between the home buyers and real estate investors.
Consumer Behavior
We’ve already talked about how the performance of the stock market has an impact on consumer behavior. Consumer behavior in general is also a factor in deciding whether real estate investments will be shared by changes in the stock market.
With a more successful stock market, consumers will likely take the risk of making real estate investments. With the market declining, consumer spending will also go down.
Since people won’t be spending money so often or so readily, real estate investors aren’t likely to offload their properties. This will turn into a cycle; since investors would see their portfolio going down, they’d also be more cautious and save their cash for any potential problems in the future.
The Nature of Market Competition
Whether we’re talking about the housing market or the stock market, there’s a certain amount of competition in both aspects. There could be several buyers for one property. Banks could compete for the business of providing buyers with loans or conducting transactions.
However, a declining stock market will also mean a loss of confidence and thereby competition within the housing market. There won’t be as many people vying for the same investment properties. So, demand for services will also go down.
All this could actually mean that a buyer will eventually come out on top. Banks will be competing harder for their business, which could affect interest rates.
On the other hand, a favorable stock market might have the reverse effect. Banks could raise their rates and make the buyers compete for their services.
The Takeaway
It’s evident that changes within the stock market, whether positive or negative, have a certain level of influence on how the real estate market performs. The perception of buyers, the behavior of the banks, and the long-term planning of the lenders are all essential aspects of the housing market. These, along with several other changes, are evident when the stock market experiences a major shift one way or the other.
At the end of the day, property or housing buyers will be watching the highs and lows of the stock market. With the information they get about downturns, upturns, or stability, these buyers will decide whether they can benefit from buying housing or any other type of real estate property.
In recent years, we’ve seen significant drops in the stock indexes for the American market. However, this doesn’t necessarily mean that the future of the housing market is ruined. After all, there’s always the hope that the stock market will see a recovery before it does too much damage to the housing industry. A property investor can also find several tools online to find the most lucrative properties that they can afford to invest in even when things seem bleak.
Finally, staying up to date on the flow of the stock market is essential for any investor out there. You might be paying a lot of attention to the housing market, taking note of the interest rates as well as the mortgage rates, consumer confidence, consumer behavior, and the housing prices in general.
Staying abreast of the stock market wouldn’t be too hard; you can probably download an app for that purpose. This way, you can keep in touch with the trends, crashes, and booms with a few taps of your finger. Download any likely app right now and see whether those stock market changes have any influence in how you feel about your real estate investments. Who knows, you might be able to expand your portfolio or make it more streamlined for better profits according to the current times.
Benzinga's Related Links:
- 6 Ways to Start Investing in Real Estate: Step-by-Step • Benzinga
- The Best Places To Invest In Real Estate In 2021
- 11 Best Real Estate Investing Apps in 2021 • Benzinga
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Original publication: May 3, 2021
