A stock market crash often signals an impending recession, and recessionary times are typically not conducive to strong housing markets. Nevertheless, the relationship between stock markets and housing markets is not always so simple, and several other factors can influence home prices in the event of a stock market crash. In this blog post, we'll explore some of these factors and try to answer the question of what would happen to home prices if the stock market were to crash.
Stock market crashes occur when stocks fall drastically, often unpredicted. The sudden drop in stock prices may be influenced by economic conditions, catastrophic events, or speculative factors.
Investors suffer heavy losses during market crashes, which are short bursts of a market downturn that can last for a single day or much longer. Several stock market crashes have occurred throughout history, including 1929, 1987, and 2020's COVID-19.
The U.S. economy today is strong across multiple fronts. For example, unemployment reached over 9% in 2010 - but by 2018, the number had dropped to 3.7%.
In the aftermath of the financial crisis, the stock market has also shown remarkable recovery. Although it is still known as a rollercoaster, it keeps breaking records, including the Dow reaching a record high for the 15th straight year in 2018. The economic relationship between the stock and housing markets has returned to normal as both markets have recovered independently. Although they don't directly influence one another, they affect each other indirectly.
The relationship between equities and housing is quite modest, explains Matthew Gardner, Chief Economist for Windermere Properties.
The stock market increases our wealth, but they are also very different, and we can be influenced to spend more money on housing. Most of us review our portfolios regularly; however, it is almost redundant to do the same for our houses. Housing is a shelter first, then an investment.
In the opposite direction, the housing market affects the stock market. When a housing value declines, we are less likely to invest in equity.
Strong stock markets today can influence home prices by allowing buyers with strong stock portfolios to spend more on housing, which could theoretically affect home prices.
Every short-term stock correction has little or no impact on the housing market. However, any systemic contraction in equity markets can significantly affect the housing market.
If the stock market remains vital for a prolonged period, this will have a positive effect on the housing market. If the stock market becomes weak for a considerable period, this may also negatively impact the housing market.
Factors that can influence home prices in the event of a stock market crash:
Economic activity, including the level of consumer confidence and spending, is affected by the economy's health.
Interest rates influence mortgage rates, other debt obligations, and stock prices.
Real estate values are affected by supply and demand, as well as local conditions.
Home sales volume and price trends are influenced by national economic factors such as unemployment levels and wage growth.
The stock market crash of 1929 led to a massive economic downturn. It's one of the most significant events that led to the Great Depression. But what does this have to do with home prices? In 2008, when the housing market crashed, we saw a similar response from the stock market. The Dow Industrial Average fell by almost 50%.
While many factors can affect home prices, like interest rates and economic activity, there's no doubt they're closely tied to what happens in the stock market. The good news is that home prices tend to bounce back when stocks rebound.
Falling home prices tend to have a negative impact on wealth and the stock market.
When home prices fall, households see their primary wealth source decline, lowering their confidence to spend. It leads them to pay off their mortgages earlier with more money.
In the event of a falling house price, more people become trapped in negative equity (where the value of their home is less than their mortgage). This results in reduced spending and prevents equity withdrawals.
A decline in house prices negatively impacts the construction of new houses.
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