How Much Will Stock Market Downturn effect Real Estate Prices?

Very recently, The US financial market experienced its biggest one-day loss since June 2020, the year of the pandemic.

The Dow Jones tumbled 3.9%, the Nasdaq plunged nearly 6% and the S&P 500 was down 5% - its biggest decline since March 2020.

What is The correlation between the stock market and real estate

The stock market and real estate markets are two of the most popular ways to invest in the equity market. The correlation between the two can be seen through a number of different lenses.

One way is through their similarity in shape: both markets tend to move in similar patterns over time. Another way is through their movements at certain points in time.

For example, if you look at the stock market on a daily basis, you will notice that it tends to have highs and lows every day; however, this pattern doesn’t always hold true for real estate as well.

Another way to see how the two markets are correlated is by looking at what happens when one market goes up or down in relation to the other one.

Here are some Critical Points in US Economic History and correlation

The 1873 Stock Market Crisis, or Panic of 1873, originated in the US but had global repercussions, triggering widespread economic downturn and financial instability. It was fueled by speculative railroad expansion, leading to over-investment and subsequent decline in railroad securities.

Full scale bank collapses contributed to the economic turmoil of the time with several highly established banks falling on their knees. The most notable example was Jay Cooke & Company’s collapse due to overinvestment in railroad stocks and securities. This ultimately led to widespread societal panic, a swarm of bank runs, and multiple bank collapses nationwide.

While the Panic of 1873 affected various sectors, its impact on the US housing market was indirect but significant. Credit contraction limited access to loans, decreasing demand for housing. Economic downturn and declining incomes further suppressed housing demand. Depression and deflation led to property value decline, widespread foreclosures and increasingly challenging housing market conditions.

The most notable crash of the 1900s took place in 1929, with the crash of Wall Street leading to the Great Depression. As a result of the crash, prices fell up to 67% with properties plummeting in value and bank lending decreasing as well. Just a decade before the real estate market had been booming with markets like Manhattan in New York representing almost 10% of all real estate wealth in the country. This same market lost over half it’s value by the end of 1933. The repercussions of this crash are thought to have affected property markets until 1960 when prices finally recovered.

The depression would continue until after the second world war where the economy and real estate markets were able to rebuild. The next cycle of real estate remained stable until the stock market hit another low in 1974. Leading up to the year 1970 inflation rose from under 2% to over 6%, causing the cost of a new home to nearly double.  Home prices continued to grow over the next 20 years, bolstered by legislation encouraging banks and lenders to grant funding with little regulatory oversight. 

Until the end of the 1990s, the market was boosted by increases in real estate collateral and growing credit options. On the surface, all appeared to be well, but there were still significant issues for real estate investors. A savings and loan crisis caused interest rates to rise, new home construction dropped to its lowest since World War II and housing prices were flat until the end of 1997.

Going into the early 2000s, the US and the rest of the world was going through a housing bubble. The rate of mortgage fraud skyrocketed, and the country entered into the century with an early recession. Despite these facts, the mortgage denial rate halved between 1997 and 2003.

From June 30 2004 to June 29 2006, the Federal reserve hiked rates from 1.25% all the way to 5.25% to put off inflation. This caused a significant increase in the cost of lending and many borrowers saw their loan repayments escalate by 60%.

During these few years, the Federal Reserve also had a looser approach to supervising banks and lenders, many of which abandoned loan standards such as measuring employment and income history in borrowers. With the cost of lending increasing so greatly and markets going through a correction, the bubble had officially been burst.  

In 2007, real estate crashed completely with hundreds of thousands of homes going into foreclosure, multiple subprime lenders declaring bankruptcy and the market requiring government bailouts. The market continued to slow down, with flat prices and home sales being the biggest trend. The subprime mortgage industry suffered widespread collapses, including the closure of some of the nation’s biggest lenders at the time like New Century Financial and Lehman Brothers. Real estate was not the only industry affected, with many other fields experiencing bankruptcies due to the credit crises. The global stock market also faced correction and volatility. 

Considered to be one of the biggest economical declines since the Great Crash of 1929, the 2008 housing market is still having palpable effects on the economy that are still being felt today