How Stocks Affect Buying A New Home

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It’s no secret that the 2008 recession greatly affected the housing market.

According to MarketWatch, flimsy lending policies and overeager new construction home builders invested in residential properties that no one bought. Homeownership rates and new home prices hit all-time highs before crashing down as many borrowers went into foreclosure.

Another similar scare was recently prompted by the stock market’s volatility in early February.

However, housing experts across the nation are calming nerves by reassuring that the housing market is “unlikely to be the culprit this time around,” according to the MarketWatch article.

In the past week alone, the Dow Jones Industrial Average...fell by nearly 2,000 points, rose nearly 600 points...dropped again by more than 1,000 points” then rose more than 500+.

Some economists cite strong financial news as the reason behind the newfound fluctuations while others conclude a sell-off in the bond market as the push toward mortgage rates at a 14-month high.

Housing Bubble Or Market Correction?

“A bubble happens in the housing market when builders are irrationally building houses on spec when demand is falling or when buyers are seeing prices are going up and can’t really afford to buy but do so because they figure they can build up equity quickly,” Joseph Kirchner, senior economist for Realtor.com, said.

We're seeing a market correction, which is unlikely to slow buying activity. However, fluctuation in the stock market historically makes people wary of making major investments. This is a good thing because it tends to slow the buying pace of “flip investors”, which caused much of the increase in foreclosures that resulted from the 2008 bubble.

Why The Housing Market Is OK

According to Zacks, a leading investment research firm that focuses on stock research, analysis, and recommendations, "Many people assume a direct relationship exists between the stock market and real estate values. Statistics indicate little direct or causal relationship."

The housing market bounced back after the recession, thanks to an increase in high-wage employment from companies like AmazonOn the East coast, in the D.C. Metro market, first-time and seasoned buyers are relocating for well-paying, easily-commutable jobs in the government and defense sectors.

Locally, many renters are finally taking the leap into homeownership, which also helps prices increase and home builders remain confident. These former renters are trending toward larger properties instead of small starter homes, which drives up home prices due to tight inventory.

“The housing market is very strong still,” Daren Blomquist, senior vice president of real-estate analytics firm Attom Data Solutions in Irvine, California, said. “The strength of the housing market and economy in general is what’s spooking the stock market.”

It’s About The Interest Rate

However, the stock market’s continued volatility and/or cooling equities could affect home buying activity. Stock market investors and housing market analysts are honing in on interest rates.

Their concern is that the federal government will increase interest rates on homes at least once in 2018, which could negatively hit the stock market.

While low interest rates have played a factor in rising home prices, this trend could change. Mortgage rates have rebounded to a 10-month high in recent weeks, and if they continue to rise, it could put a long-term damper on home price appreciation in some areas since prospective buyers couldn’t afford those high prices.

Even with this logic, Sam Heskel, CEO of Nadlan Valuation, a real estate property valuation firm in Brooklyn, New York, remains positive.

“The stock market adjustment can...bring mortgage rates down a bit, which could help the housing and the mortgage markets.”

However, interest rates remain historically low, and as long as lending rates are low, savings rates also remain low. Check out this chart from Go Banking Rates to learn about the direct correlation between lending rates and savings rates. 

The bottom line is that interest paid on a home mortgage remains tax deductible for the majority of new home prices in our regional market. While a slightly higher mortgage interest rate may feel uncomfortable upfront, the deductibility helps to offset the income tax burden of higher wages.