Today’s abbreviated trading session on Wall Street brought us to a Bear Market. While bears may be cute and cuddly concerning stocks not so much. Concerning a Bear Market here are some facts:
The term on Wall Street is synonymous with serious, long-lasting declines in stock markets. In numeric terms, a bear market is a 20 percent or more drop from a recent peak. This has happened, now the question is will the downturn in equity values continue?
Pessimism tends to prevail. When good news isn’t enough to hold off sellers and despite solid economic conditions, markets continue to tank — that’s a bear market. Of note while the economy seems to be running full steam ahead in general equity markets look to the future and the earnings and continued expansion may have peaked, only time will tell.
Since World War II, bear markets on average have fallen 30.4 percent and have lasted 13 months. When that milestone has been hit, it took stocks an average of 21.9 months to recover.
Now the question is; if this Bear Market continues what can we expect on the housing front? This is a challenging question as housing is not liquid, reacts to trends beyond financial headlines and it can be a hedge against a falling equities market i.e. preservation of capital invested in one’s home.
The housing market is unlikely to hurt the stock market much this time around versus The Great Recession of 2008. However, continued stock market volatility or a cooling equities i.e. a Bear Market could have an effect on home-buying activity.
Historically, the stock market takes a hit when interest rates rise and we witnessed this last week when the Federal Reserve again increased rates. For housing, meanwhile, low interest rates have arguably allowed home prices to rise as quickly as they have — but that could soon change.
Mortgage rates have rebounded this year, and continue climbing. If rates were to continue to rise much higher, it could put a damper on the home price appreciation occurring in some markets, since prospective buyers would be less inclined or able to buy homes at such high prices as higher interest rates impact one’s monthly payment i.e. more $ allocated to interest and loan repayment versus equity appreciation.
However some analysts believe that the recent stock market turmoil could slow interest rates’ ascent. “The stock market adjustment can help bring mortgage rates down a bit which could help the housing and the mortgage markets. However for many prospective buyers witnessing their stock portfolio either in their retirement or saving for a down payment, the paper loss may curb one’s appetite due to the lessening of the wealth effect a Bull Market produces.
In Denver we have witnessed a cooling of the market, which has been a relief to buyers, and more challenging to sellers yet this comes after a 5+-year ascent in prices, which is not sustainable in a rational market.
Locally we need to watch the winter months and see what comes on the market, how it is priced and activity i.e. days on market before going under contract and price adjustments.
I am personally a proponent of not using one’s home as an investment vehicle. I have always believed one’s home is shelter and the benefits from tax deductions to hedging against inflation are bonuses. Yet with low interest rates and some purchasing a payment versus true equity appreciation; as with any market there will be winners and losers.
My advice with 20+ years as a real estate broker remains the same; if you find the correct house and it is affordable meaning within your budget and you plan to stay 3-5 years or more, go for it. Some would suggest and I tend to agree housing in a bear market can in fact be a safe haven. If you are in the market and speculating or fix/flipping and so forth I would strong suggest caution and/or an alternative option if your original strategy does not produce the profits you desire.