Stock Market Jitters & How it Impacts SF Real Estate

The sky is falling!  Well, maybe not quite, but there has definitely been some buzz about the roller coaster this week that is the stock market.  The Dow fell more than 1800 points over two sessions (Friday and Monday).  The 4.6% tanking on Monday, alone, was the biggest since 2011’s Euro debt crisis and is rippling through all of the International markets at this point.  More importantly for you (as a consumer), was the impact to mortgage rates, which shot up to near 3 year highs and could very well continue the trajectory. As for the impact to the San Francisco area housing market?  Tough to say in a singular response, but first, we should review what exactly is causing the sell off in stocks.
First reason is that the stock market is likely just doing what is has been long expected to do – pull back or correct itself.  Stocks have been rising in a straight line UP since November 2016, which can often be dangerous.  The pace and intensity at which the market has been driving had many analysts predicting that the market was in line for 5-10% pullback.  Like the old saying, “what goes up must come down,” but that may not be the worst thing in the economy.  Cheaper stocks means they are more affordable and attractive to investors, more so now because companies are in healthy shape at this time, by and large.
Second reason is that there is wide concern that the Fed will raise rates more.  Stocks have been spiking since the election because the economy is in overall strong health.  Unemployment is at historic lows and hiring is opening up.  This leaves companies having to pay workers more so they can retain them, but also attract new ones.  Ultimately that causes companies to raise prices in some shape or form to afford the swell in payroll and that is what is defined as INFLATION.  To combat inflation, the central bank (or FED) will raise rates, which leads to the third reason for the stock market jitters.
When the FED raises rates, the cost to borrow money increases, which means that companies pay more for their loans.  At the end of the day, this cuts into corporate profits and that can scare investors into thinking that companies are not as healthy as they had presented themselves to be.  More expensive loans also mean that homeowners and aspiring home buyers pay more for mortgages.   Mortgage rates are affected by the bond market and mortgage backed securities.  US Treasury bond yields have been so low, in large part, because the central bank was purchasing so many of them to keep rates low during the economic recovery and through.  As well, stocks were offering a much more attractive return, despite being higher-risk investments.  So there wasn’t much appeal in the safe-haven of bonds as of late because of the tear that the stock market had been on.

Impact on Local Real Estate

Knowing these catalysts to the stock market sell off, what is the impact on real estate here at home in the Bay Area?  More expensive mortgages could certainly affect affordability and buying power, but the middle ground is that this could temper demand and cause price increases to slow. How much remains unknown and time will tell since we are so early in this new reality of slightly higher rates, but at the end of the day, purchasing a home or taking out a mortgage are personal decisions and the macro market caveats discussed here don’t always rank high for a person when deciding what to about moving their family, settling down, or upgrading their living space.   To check your affordability or pre-qualify for a mortgage in this market, email me at arjun@lendclear.com.
More to come in the following weeks of the first quarter of 2018……