Contrasting the housing market and the stock market is the jumping off point for this month’s question and answer session between John Rebchook, of Denver Real Estate Watch and Lane Hornung, Founder and CEO of 8z Real Estate.
The housing markets in already hot markets such as the Bay Area and along the Front Range kicked off 2016 in spectacular fashion. The stock market, on the other hand, was at the other end of the spectrum, punishing equity investors in January.
John: By many metrics, it was the best ever January for Denver and the Bay Area housing markets, while it was one of the worst Januarys ever for the stock market. Why do you think the housing market, with double-digit year-over-year gains, is doing so much better than the stock market, which lost money?
Lane: Ultimately, markets are driven by true forces, not just the whim of the day. I think the fundamentals for the housing market are very strong.
John: How so?
Lane: We have increasing demand with household formations on the increase and limited supply.
John: According to the Colorado Association of Realtors, there is only a 5-week supply of unsold homes on the Denver-area market and only a 3-week supply of condos. What will that mean for home buyers and sellers in the coming months?
Lane: It’s going to be like last spring with multiple offers and bidding wars, especially for homes that are priced right and show well. It may even be more intense than last year.
John: Let’s focus on the stock market for a moment. Do you think that a decrease in the “wealth effect” from falling stocks could hurt home sales?
Lane: Maybe a little bit at the upper end. But for the most part, no. That is probably a little more pronounced in cities that attract a lot of really wealthy, overseas investors.
John: Could the falling stock market have the opposite impact? That is, consumers feeling better about putting their money into a home than the volatile stock market?
Lane: Without a doubt. And remember, far more people own homes than own stocks. For a lot of people who do own stocks, it is in their 401(k)s and they don’t pay too much attention to what is happening on a day-to-day basis, because it’s there for their retirement. Far more wealth is created in the U.S. from homeownership. For most people, their home is by far their largest investment.
John: A fundamental difference is that while stocks are purely an investment, a home is primarily a place to live, not just an investment.
Lane: Absolutely. Homes are that rare hybrid that provides an investment over time, while also improving your quality of life.
John: And there also are tax-advantage reasons for owning a home.
Lane: While most people are aware of the tax advantages of being able to write off the interest on your mortgage, what has gone largely unnoticed is that most home buyers leverage the purchase of their home.
That is, if you buy a home for $300,000, and put 20 percent down, you pay $60,000 and get a mortgage for $240,000.
So if your house appreciates 20 percent that is a $60,000 increase on the value of your home. And you only paid $60,000 out of pocket. 20 percent may sound like a lot, but over the past couple years most people have seen at least that. On the other hand, very few people buy stocks on margins.
John: Speaking of interest rates, one benefit of the scary stock market is that it has helped keep interest rates low.
Lane: The instability in the stock market might cause the Fed to be a little more conservative as far as raising interest rates this year. And the volatility of the stock market has led to a flight to safety, and as more people move their money into bonds, it helps keep interest rates low which is very good news for home buyers.