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If Home Prices Fall Will Stocks Follow

Analysts predict home prices will decline over the next year. But what does that mean for the stock market? (opens in new tab) (opens in new tab) (opens in new tab) Newsletter sign up Newsletter (Image credit: Getty Images) By Will Ashworth published 11 October 2022 Morgan Stanley recently said that it expects U.S. home prices to drop by 7% between now and December 2023. That might not seem like a lot, but if its prediction comes true, it would be the second-largest decline in housing prices since the Great Depression. That's not going to be good for the stock market. Here's why.

What's Next for Stocks? The Pros Weigh In The average family has two household finance buckets: income and spending. Money comes into the income bucket from your job, freelance gig, small business and passive investments such as stocks and exchange-traded funds (ETFs).

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Profit and prosper with the best of Kiplinger's expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail. Profit and prosper with the best of Kiplinger's expert advice - straight to your e-mail. Sign up That income goes out to pay all of your fixed and variable expenses. The mortgage or rent check is the biggest fixed expense for most American households. Whether you rent or own, housing affordability is near or at all-time lows, leaving little for other savings-related initiatives such as your retirement plan. "Affordability is already challenged, exposing would-be homeowners to an increasing rent environment that erodes their ability to save for a down payment. If that were to be combined with increasing unemployment, we could imagine a scenario in which existing home sales continue to outpace the GFC to the downside," Fortune contributor Lance Lambert reported (opens in new tab) recent comments from Morgan Stanley researchers.

10 High-Paying Dividend Stocks Yielding 5% or More If you're renting and interested in buying a house, the upside of falling prices is that you're going to be able to find your dream home for less. The downside of falling home prices is that your carrying costs will be higher due to increased mortgage rates. So, for the renter, the savings are fleeting. For the mortgage-free homeowner who doesn't plan on moving, their circumstances won't change much. However, the household that's been considering refinancing won't be nearly as enthusiastic about the process today as they were a year ago. We know this from current mortgage refinancing activity.

Investing in Emerging Markets Still Holds Promise According to the Mortgage Bankers Association's Refinance Index, refinance applications fell by 18% for the week ending Sept. 30, 2022, compared to the previous week. Meanwhile, applications were down 86% from the same week a year ago. They've all but dried up. Whether you're a renter or a homeowner, now is not a good time to be making long-term decisions.

Home Prices and the Stock Market

As for stock markets, the current environment of rising interest rates, falling home prices and high inflation is a triple whammy because it makes it that much harder for the average saver to come up with funds to invest. Empirically, it's been shown that home prices do influence stock prices. The obvious example would be the Great Recession, which officially lasted 19 months, from December 2007 to June 2009.

16 Dividend Kings for Decades of Dividend Growth According to Federal Reserve data, U.S. household wealth fell by approximately $16.4 trillion from the first quarter of 2007 ($65.8 trillion) to the first-quarter of 2009 ($49.4 trillion). Two years after the official end of the recession, Americans had barely regained 50% of their lost wealth. At the same time, real estate values fell by almost 30% from the beginning of 2007 to the end of 2010, while the S&P 500 declined by 12% over that same time frame. While no one is predicting that home prices will fall anywhere near 30% this time around, it's important for investors to realize that indexes such as the S&P 500 and Dow Jones Industrial Average aren't likely to reverse course in the near term. So, if you're thinking of buying stocks in the fourth quarter, the data suggests the odds of success are stacked against you.

Buffett Is Loading Up on Occidental Petroleum Stock (OXY). Should You? Will AshworthContributing Writer, Kiplinger.comWill has written professionally for investment and finance publications in both the U.S. and Canada since 2004. A native of Toronto, Canada, his sole objective is to help people become better and more informed investors. Fascinated by how companies make money, he's a keen student of business history. Married and now living in Halifax, Nova Scotia, he's also got an interest in equity and debt crowdfunding. Latest 4 Ways You Can Take Advantage of a Down Market With markets down for the year, it may seem that all the news is bad. But now could be a good time to make some profitable moves. By Adam Grealish • Published 11 November 22 New, Used or Leased: Is Now the Time to Buy an Electric Vehicle? The Inflation Reduction Act created new tax breaks for electric vehicles. Here's a guide to which EVs count and the best time to buy. By Rivan V. Stinson • Published 11 November 22 kiplinger About Us (opens in new tab) Terms and Conditions (opens in new tab) Privacy Policy (opens in new tab) Cookie Policy (opens in new tab) Kiplinger is part of Future plc, an international media group and leading digital publisher. Visit our corporate site.
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