The stock market has been on a rollercoaster, wouldn’t you say?
We have no idea if the Dow Industrials would be up or down by the time this newsletter is published. It’s probably wise not to bet on either direction, given it has experienced the largest single-day plunge in history, dropped another thousand points the next day, rallied back up a thousand, just to drop another 400 all within a matter of days as of this writing.
Is the takeaway that we should all panic? Of course not. But it is worth pointing out that experts and analysts – including Janet Yellen, who called stock and real estate valuation high and a source of concern on February 2, the day of the infamous 666-point plunge – had been warning about an overheated market and many predicted that a correction could be in sight, for both stocks and real estate in the U.S.
While both have been effective wealth builders for Americans over the long term, neither stock nor home prices has historically gone up in an ascending straight line. The events in the past week were once again a reminder. As if flipping a switch, a strong equities market turned into a volatile, uncertain market overnight.
The same could happen to the housing industry. Up until now, the bullish stock and housing market were both in large part propelled by historically low interest rates. With more rate hikes on the horizon, the stock market got spooked. One could argue rising interest rates should have even stronger effects on the real estate market, after all, home prices are already high and considered "overvalued" in many major markets; rising interest rates could further strain affordability issues already plaguing homebuyers.
Recently, famed real-estate valuation expert Jonathan Miller said the most overused industry phrase is no longer “location, location, location.” The buzzword for real estate, he believes, is now “uncertainty”. More reports are also popping up to urge homeowners in overvalued markets it’s now time to sell your home, reasoning “you may never see prices this high until the next 10-year cycle”. Or as one housing market analyst told Forbes, some markets are now getting into “a dangerous range”, have become too hot to handle and it’s time to consider an exit strategy before prices correct.
This is one of the key areas where stock and real estate markets diverge. When stock prices become overheated and register an official correction, the dip could be short-lived and stocks may rebound after weeks or even days. As many of us heard this past week, experts urged stock investors not to sell and should instead ride out the correction.
Housing corrections, on the other hand, often last years. Take Las Vegas, one of the most overheated markets in the last housing peak – median home price in the market subsequently fell 62%, and still have not yet fully recovered a decade later. According to Zillow, media home price in Las Vegas is currently 19% below its pre-bubble peak. In Orlando – another pre-2008 housing top performer – media home price is currently still down 16% vs. pre-bubble high. In Miami: still down 14%; Washington D.C.: -10%; Chicago: -13%.
To top this off, many homeowners do not have the option to just “ride it out”. People have real lives to live – they move for jobs, some may lose jobs; some change schools, or outgrow their home; people get married, some get divorced. We witnessed stock investors in the past few days that could not ride it out for just a few days and sold in mass hysteria. Now imagine asking a divorcing or job-less family to try riding it out in a home they no longer want or can afford to live in for a decade.
Without an exit strategy, as more experts are now once again urging us to have, many homebuyers and homeowners over the last 10 years could not ride out the last housing crisis. In all, Americans lost $11 trillion in household wealth. With the new 10-year cycle starting, we are all on edge to see what will happen this time.