The economy is always a hot button topic when it comes to politics. This is especially true this time of the election cycle, as the presidential race is heating up. During this time, many politicians will point to the stock market and the housing market as signs of whether the economy is healthy or failing.
Although there is little direct correlation between the two markets, there are some indirect correlations between the two and they can be intertwined in some areas. In addition, both are pretty good indicators of the overall health of the economy. So before you bust out that home affordability calculator and try to see what homes you can purchase, you might want to take a step back and gain a deeper understanding of these two industries.
Understanding these industries can help you learn what the best time to buy a home is, and may even allow you to find a better deal or mortgage on your home. In order to do that you will need to have a basic understanding of both the stock market and the housing market and understand how they influence each other.
Interest Rates
A huge way that the stock market and housing prices are intertwined is through the interest rates that are offered throughout the country. When people buy a home, it usually combines two forms of payment:a down payment and a mortgage.
A mortgage is a loan given to you by a bank to pay off the rest of your home. However, as with any big loan, there is a significant amount of interest tacked on to that loan. This is where the stock market comes in. The stock market helps determine what the interest rates in the country are. If the stock market is extremely strong, then the economy is likely doing well. This means that things like unemployment and poverty rates and the risk of being laid off are low. As a result, banks will see investments as much lower risks and will be more willing to spend, meaning that you’re not only more likely to get a loan, but also that the interest rates will be lower.
On the other hand, a stock market that is trading poorly typically means the economy will be weak. This often translates into high unemployment and risks of being laid off. In those cases, banks will invest less. Even when banks do invest in these times, they will cover themselves from risk by charging high interest rates. These rates could cause demand to drop in the housing market, and as such could play a major role in pricing.
Economic Health
One of the biggest ways that the stock market influences housing prices is through the overall economic health of the United States. This can be seen as more of a psychological effect than an actual direct correlation. When stock markets are at record highs and the economy is booming, then there is a feel-good attitude throughout the nation when it comes to the economy. This feeling that occurs when there is a healthy economy can be a major factor in whether or not people are buying homes.
If people feel that the economy is healthy, then they will be willing to go out and make big purchases. This is because they will feel secure in their financial positions and won’t have to worry about being fired or laid off. We are much more inclined to spend money when we feel safe and secure, and that is evident in the housing market. So while a good stock market may not directly influence the housing market in this aspect, it could still have a pretty big indirect influence when it comes to the overall health of the economy.
Buying Power
Another big way that the stock market can influence housing prices is through people’s buying power. If the stock market is setting record highs, then many people will likely have stacked portfolios filled with valuable assets. These portfolios can then be used to gain vast amounts of income quickly, thus greatly increasing buying power.
When there is a lot of disposable income and buying power in the hands of individuals, then they will typically turn to bigger purchases. These purchases include things like cars and new homes. In addition, people will be looking to move into bigger and better homes with their newfound disposable income. As such, people will be placing their current homes on sale looking to upgrade their place of residence, thus increasing the number of homes for sale in the market.
With so much eagerness to spend, more homes will pop up on the market, and housing prices will rise as a result of the increase in demand. However, in a poor stock market, people will be losing out on a lot of money. Many of their portfolios will tank in value, and they won’t have the ability to sell for massive amounts of profit and disposable income. As a result, people will have less buying power and disposable income, resulting in fewer homes being bought. Since demand for houses would decrease, the housing market itself would stall.