Diversification is one of the key factors in wise investing, and that means that many real estate investors also dabble in the stock market. Though they are two very separate investments, they are inextricably linked in several ways. If you’re a real estate investor, it’s important to understand how the stock market might affect your rental and investment properties – including your financing opportunities.
Stock Market Volatility Affects Interest Rates
The volatility of the stock market – or the rate at which stock prices increase or decrease over time – has a dramatic impact on mortgage rates. When volatility is low, buyers and lenders alike have increased confidence regarding the borrower’s ability to repay the loan. When stock market volatility is high and prices fluctuate sharply, buyer and lender confidence regarding the ability to repay the mortgage declines. This drives mortgage interest rates higher. In short, when the stock market drops, the entire housing market is affected, including interest rates, property values, and even consumer and investor behavior.
Down Payments Become Harder to Handle
A 20% or higher down payment is important if you want to secure a low mortgage interest rate and save money over time. When the stock market falls, or when volatility is high, it’s often a signal that the economy is troubled, so investors feel less confident about putting down a significant sum of their liquid assets toward new purchases. However, with a down payment of less than 20% of the property value, the interest rate climbs, and depending on the state of the economy, it may be difficult for investors to secure funding at all. Stable stock markets allow for more flexibility, which helps investors feel more confident about a larger down payment.
Housing Prices Fluctuate
Fortunately, even though a volatile stock market drives interest rates upward, this is often balanced by a decrease in overall property values. Fewer investors and buyers take on mortgages when interest rates are up, and that means homes tend to sit on the market unsold. The longer homes and properties sit on the market, the more the values fall, and this helps to balance the higher interest rates. Conversely, when the stock market is stable and booming, and when interest rates are low, housing demand goes right back up – and that drives property values upward, as well.
Finally, it’s important to consider how the stock market influences investors’ confidence in their current and future financial performance. Healthy stock market indexes boost investors’ confidence, and they are far more likely to buy investment homes to further diversify their investments. When indexes start to fall, investor confidence takes a hit, and buying more property might seem far riskier. The stock market is always fluctuating, and that means investor confidence fluctuates, as well.
The stock market has a significant impact on the housing market, and that impact affects everyone, from investors to first-time buyers. Your ability to understand the stock market and accurately predict periods of volatility can not only help you secure better interest rates, but it can also help you make better decisions about your investments overall.