03.21.2001 :: Real Estate News
How Will The Stock Market Plunge Impact Real Estate
Peter G. Miller

The great ride on Wall Street is over, at least for the time being and perhaps for much longer. In the past year, says The New York Times, shareholder equity has fallen by an estimated $2.7 trillion, a big number by any standard and one which will undoubtedly influence the sale and financing of real estate in 2001.

Stocks, bonds, and real estate are sometimes seen as competing investment mediums, but the reality is that they are all tied together. If you like real estate as an investment option, you want folks on Wall Street -- and millions of investors and pension holders nationwide -- to do well because rising values benefit everyone.

Conversely, when stock values fall, investors and equity holders in other areas need to consider how they will be impacted.

As stock prices rose during the past decade investors gained two advantages: They could sell for cash or hold. In the first case bank accounts swelled, big downpayments became easy, more people competed for a limited stock of properties, and the result was higher prices generally and vastly higher prices in places such as Silicon Valley and Seattle.

Investors who held as stock values rose became richer and richer -- on paper. Since lenders like to see a big net worth and lots of assets, those who held rising stocks had little trouble getting either more credit or big mortgages.

But in the past year -- and especially in the past few months -- many stocks have seen plunging values. Even real companies with substantial businesses and believable prospects for the future have been hit. USA Today, for example, looked at the yearly highs for given stocks and compared those prices with the daily close as of December 20th. They calculated that lost equity for many leading companies topped $100 billion. As examples, three companies saw combined equity reductions of more than $1 trillion from yearly highs: Microsoft was down $418 billion, Cisco was off $327 billion, and Intel was down $295 billion.

What does this mean in terms of real estate?

When stocks become over-priced, investors seek safer options for their money. Bonds and other fixed-income investments are typical choices and the result is that additional money ultimately flows into real estate in the form of more mortgage money. More financing dollars, in turn, will likely lead to lower rates and reduced mortgage costs, the best way to stimulate home sales.

Reduced stock prices will mean less cash at closing for many buyers, not a big issue in the sense that loans with little or nothing down are increasingly available. With a reduced net worth, however, some prospective buyers may elect to stay out of the market, thus reducing demand. Also, with a lower net worth, lenders will look harder at loan applications. Some loan applications which would have sailed through a year ago may now be tough to close.

Sales volume, which is expected to include a little more than 5 million existing homes in the past year according to the National Association of Realtors - plus more than 900,000 new units according to the National Association of Home Builders - is likely to continue at strong levels, in part because of lower interest rates, a growing population, continued job mobility, and high levels of employment. Healthy unit sales, in turn, are good news for homesellers, real estate brokers, builders, and mortgage lenders.

While broad national trends are important and likely to impact loan rates (because money can go anywhere), real estate itself remains a localized commodity. Prices down the street are impacted by such factors as nearby schools, the local job market, population growth, and the opening -- or closing -- of a nearby mall.

In effect we have a market with two levels to watch. Mortgage rates reflect national trends and are strongly influenced by events on Wall Street, while home prices are a by-product of local economics. Because mortgages are important it's wise to keep an eye on Wall Street -- and another eye the on local marketplace to track home pricing trends.

This is a reprint of an original article written by Peter G. Miller for Realty Times.