Does the Stock Market Affect the Housing Market?

In 2008, investors worldwide witnessed exactly what could happen to the stock market if the domestic housing market in the United States started to crash. Although we now understand just how much the housing market can influence the stock market, perhaps another question is this: from the opposite perspective, can the stock market affect the housing market?

In many ways, the rise and fall of major stock indexes can trigger a variety of actions and behaviors that can indirectly affect the way people choose to buy and sell their homes. Although there is no direct link between these two markets, it is very possible that significant action in either can influence the behavior of the other.

Interest Rates and Lending

One of the more direct relationships between the housing market and the stock market involves credit. When people buy homes, they typically pay a portion of the home price up front and rely on large bank loans to finance the rest. Depending on investor sentiment and the health of the domestic economy, which is largely influenced by actions taking place in the stock market, interest rates for loans could go up or down.

In times of low volatility, banks often will lower interest rates because of increased confidence in borrowers' ability to repay loans. In times of high economic volatility, interest rates could increase because of uncertainty. In either situation, the stock market plays a significant role in influencing the growth and/or reduction in volatility and market risk.

Changes in Consumer Sentiment

There is typically a direct correlation between fluctuations in stock market indexes and consumer sentiment. When major indexes rise, consumer optimism generally increases. Likewise, when indexes sink, consumers typically become more fearful or pessimistic. With this in mind, we can see how the health of the stock market can influence an individual's decision to buy a home.

If the market is booming, it is quite likely that a consumer will consider the opportunity to buy a home an excellent investment that will gain value over time. However, in situations when the stock market is declining, a home purchase might be considered a risky investment that could transform into a liability rather than an asset. In either situation, the health of the stock market acts as a bellwether for a variety of purchasing decisions made by consumers across the domestic economy.

A Buyer's Market

There could be one silver lining for home buyers in a falling stock market, however. As the number of prospective buyers decreases, it is possible that banks will alter their lending policies to woo individuals from an ever-decreasing pool of prospective buyers. With that in mind, we can see how the stock market may lead to the creation of a buyer's or a seller's market.

When the stock market is booming and prospective buyers are abundant, banks have no need to offer competitive financing terms due to a shortage of properties and fierce competition. However, banks will be forced to accommodate buyers when the number of available properties far outweighs the size of the buyer population.

Mindset of Home Buyers

Although it is perhaps accurate to argue that no direct correlation between the stock market and housing market exists, we can see how changes in the stock market do influence the mindset and eagerness of home buyers. With that in mind, people who are ready to buy a home should watch the stock market to determine whether or not they are able to leverage market volatility to their advantage during their negotiations with banks.