Recent turbulence in the US economy, coupled with the signals of a potential recession triggered by the employment report on August 2nd, led to a significant drop in the stock market. Despite a rebound in the stock market amid volatility since August 9, there is still lingering panic. How does this market fluctuation affect certain real estate markets?
Not only the US stock market plummeted, but global stock markets are also on a downward trend. Investors have interpreted the lackluster July employment report as a signal that the widely acknowledged Sahm rule indicator has been triggered, indicating a possible recession in the US economy.
Named after economist Claudia Sahm, the Sahm rule has raised concerns about a potential economic downturn. However, Sahm herself has stated that there is not enough evidence yet to confirm an impending recession. She told CNBC, “We are not in a recession now, but the momentum is heading in that direction… A recession is not inevitable, and there is a lot of room for interest rate cuts.”
Ralph McLaughlin, senior economist at Realtor.com, pointed out that the impact of a slumping stock market on the real estate market largely depends on the duration. In the short term, transactions may be delayed, lower down payments could lead to higher mortgage rates, or buyers may have to cancel deals if they cannot secure alternative funding.
On a positive note, mortgage rates hit nearly a year-low during the week of August 5, with the 30-year fixed rate dropping to 6.47%. However, if the stock market continues to decline without prompt or sufficient rate reductions, home sales may stagnate, especially in the high-end real estate sector.
In another aspect, July saw a rebound in the service sector economy, countering recession talks. McLaughlin believes that if economic data continues to support the notion of a softening economy, we could witness further rate cuts. Nevertheless, today’s data did not offer additional support.
Regarding specific real estate markets most prone to being impacted by a stock market downturn, luxury residential and high-value property concentrated markets top the list. Since stocks are disproportionately held by high-income and high-net-worth individuals, stock market gains can translate into the cash needed to compete in the luxury housing sector.
When stock values rise, shareholders can afford pricier real estate, thereby driving up luxury home prices. Conversely, a stock market downturn will directly reflect in the luxury housing sector.
McLaughlin explained, “If someone is using stocks to purchase a home, they might have to delay closing to find other cash sources, accept lower down payments and higher mortgage rates, or forgo the purchase altogether.”
The law of supply and demand suggests that this could lead to a softening in housing prices, particularly in areas catering to more affluent buyers.
Looking ahead, broader economic conditions may play a pivotal role. McLaughlin added, “If a weak stock market reflects a broader economic downturn with rising unemployment, layoffs, slow or negative wage growth, and declining GDP, we may observe a direct cause-and-effect relationship between stock market changes and the sluggish real estate market.”
To understand which real estate markets are most susceptible to a bearish stock market, Realtor.com identified areas with the highest proportion of million-dollar homes and those that experienced the fastest growth in the past five years.
By these standards, the real estate markets of San Jose, San Diego, and Los Angeles in California emerged as the top areas most vulnerable to the effects of a stock market crash.
In the San Jose metro area, the median home list price is nearly $1.4 million, with 69% of homes listed above a million dollars and a 19-percentage-point appreciation in million-dollar properties over the past five years. In the San Diego metro area, the median home list price is close to $1.04 million, with 51% of homes listed over a million dollars, and a 23-percentage-point appreciation in million-dollar properties.
These coastal metropolitan areas have a combined population exceeding 18 million, with a significant portion of homes priced above $1 million. Moreover, each city’s median list price surpasses $1 million, indicating that more than half of the homes on the market meet this threshold.
In places like the San Francisco Bay Area, high-earning tech employees often receive compensation through stock options, providing funds for expensive housing purchases. A stock market decline could have an immediate impact in such areas.
These vulnerable markets are not confined to the West Coast alone. High-priced cities in the Northeast like Boston, New York, and Bridgeport in Connecticut occupy the next three positions.
In Boston, around 2 out of 5 listed homes have a price exceeding $1 million. Just five years ago, this proportion was one-fifth, highlighting the simultaneous surge in home and stock prices. The median home list prices in the Boston metro area are close to $870,000, with 39% of homes listed above a million dollars and a 19-percentage-point appreciation in million-dollar properties over the past five years. In the New York metro area, the median home list price is nearly $780,000, with 35% of homes listed above a million dollars and a 13-percentage-point appreciation in million-dollar properties.
The remaining cities on the list include areas where demand surged significantly in recent years, primarily because people relocated during the COVID-19 pandemic in search of more affordable housing.
Places like Durham in North Carolina, Boise in Idaho, Austin in Texas, Riverside in California, and Las Vegas have witnessed an influx of buyers seeking more space and remote work flexibility, leading to a rapid short-term price increase.
In Durham, the proportion of homes priced at $1 million or more went from every 1 in 20 homes to every 1 in 5 homes. The sharp increase in high-value properties, combined with lower taxes and more space, attracts more homebuyers.
McLaughlin emphasized, “The extent of price declines we expect will depend on seller strategies and the overall economic environment. Monitoring these dynamics closely is crucial to anticipate and respond to potential market changes.”
Whether to enter the market during a rate decrease or housing price decline is a personal decision based on financial status and risk tolerance. Mark Palim, Deputy Chief Economist at Fannie Mae, reminded that buying a home should focus on one’s ability to afford a mortgage rather than solely on securing a good rate or price. ◇