The Dow Jones dropped more than 800 points on Wednesday, the third biggest point drop of the year and the biggest drop since February. As investors sell-off stock and the benchmark yield rises, what does it mean for the real estate industry? Well for one, mortgage rates could climb even higher.
Wednesday’s steep drop in the stock market isn’t too much to be worried about, in a market that was already oversold, according to Matthew Gardner, the chief economist at Windermere Real Estate.
“As far as today’s sell-off is concerned, I am really not that concerned,” Matthew Gardner, the chief economist at Windermere Real Estate, told Inman. “It has been my position for a while that the equity markets are overbought and were due for a pullback.”
But as Gardner points out, the mortgage rates are connected to the yield on 10-year treasury bonds. Normally, a stock market sell-off will drive people into bonds, which reduces yields, however, that isn’t the case right now, he explained. As stocks dropped, bonds fell too on Wednesday, according to CNBC.
“In ‘normal’ circumstances, a drop in equities drives people to bonds and that does reduce yields,” said Gardner. “This time, however, we are seeing yields rise which does raise mortgage rates. It’s a very unusual situation.”
On Wednesday, the 10-year Treasury note yield hovered around 3.23 percent, just one day after hitting its highest level since 2011, according to CNBC. The two-year yield hit its highest level since 2008.
The tech industry was among the biggest losers on Wednesday, with stocks in Apple, Facebook, Alphabet and Amazon all dropping more than 4 percent. SoftBank — which recently just invested heavily into Compass and Opendoor — saw its stock drop more than 8 percent.
Selma Hepp, the chief economist at Pacific Union International, said most people, buyers and sellers included, have been waiting for the other shoe to drop and people are on heightened alert.
“We’ve seen a notable drop in sales in September particularly in the luxury market where a lot of our buyers are tech and/or finance executives,” Hepp said. “I think recent rhetoric on trade and problems tech companies have been facing (Google, for example) is not boding well for consumer confidence.”
“As tech stocks are concerned, possibly a slight correction is a healthy development at this point again with ‘the other shoe to drop’ mentality in the financial markets,” Hepp added.
Lawrence Yun, the chief economist at the National Association of Realtors (NAR), also noted the market was currently over-priced — and even with the correction, still ahead of where it was last year. He believes the impact will be minimal and could have some small positives and some small negatives.
“Generally, when the stock market corrects, it could hit some of the upper-end markets or vacation-home markets, but at the same time, we have also seen in the past when there is a stock market correction, people will take their money out of the stock market and look to have a more tangible, durable asset in real estate.”
Aaron Terrazas, the senior economist at Zillow, explained that the stock market is by definition volatile and so for the vast majority of Americans, the periodic ups and downs on Wall Street don’t have concrete impacts beyond the anxiety prompted by looking at their 401(k).
“If the crash does persist beyond several weeks, we could begin to see it spill into the real economy,” Terrazas said. “If businesses slow their pace of investment or hiring, or worse, begin to lay off workers, then we could begin to see the housing market slow more substantially.”
Taylor Marr, a senior economist at Redfin, told Inman it’s hard to tell if today’s drop will have lasting implications. But if we assume it’s a market correction and prices that have come down – especially in tech – are here to stay, there could be some short-term impacts.
Certain markets that depend on the success of large tech companies – like Amazon in Seattle – will be impacted, Marr explained. Amazon’s stock dropping could make it tougher for those who rely on the company – whether as an employee or through the selling of its stock – to either afford their mortgage or purchase a new home, according to Marr. The luxury market could also take a hit, he added.
“Increased volatility of stock usually does impact the luxury market,” said Marr. “When there’s more uncertainty economically, luxury buyers have more pause and are a bit more hesitant to invest.”
Update: Story updated to clarify remarks made by Matthew Gardner, chief economist at Windermere Real Estate.