Economy Watch: The Pluses, Minuses of Market Turmoil for Real Estate
- Aug 24, 2015
The equities market drops that started last week, which are worldwide in scope, seem to have the makings of the correction that observers have been predicting and investors have been worried about for some time. As of Monday morning, Asian and European exchanges continued to fall. So far this year, all of the major U.S. exchanges have lost value, besides what they lost last week. The impact of the stock market movements on the various forms of real estate tends to be indirect, and include both positive and negative elements.
For one thing, the mass selling on the equities markets means that capital has to go somewhere else, perhaps to an investment that’s seen as more stable–real estate, in other words. Even institutional investors have been known to up their allocations in real estate in the face of a weakened stock market. Since the current declines are essentially a worldwide phenomenon, the scope of shifting capital to property investments is potentially enormous, and focused on United States CRE as a safe place to put money. Such a movement of capital is still hypothetical, since it isn’t clear yet how much of a correction is happening.
On the other hand, the decline in the stock market might inspire a “wealth effect” impact on the housing market, especially at the top of the market. In the case of residential real estate, the wealth effect refers to the larger and more expensive properties that upper-income people tend to purchase more of when their other investments are doing well. It’s been one of the driving factors in the expansion of upper-end housing market since the end of the recession, which has generally done better than other residential market segments. Spook well-to-do people with a stock market correction and they might drag their feet about trading up a house.
It’s also now also possible that interest rates will not rise in September as expected, thus keeping the era of low-interest real estate deals alive a little longer, which is arguably good for commercial restate. The most recent minutes from the Federal Open Market Committee hinted at the prospect of an interest rate increase, but that was before the wheels fell off stock markets worldwide. Now all bets are off on interest rates.