I used to dread stock market crashes because they brought homebuying in the San Francisco Bay Area to a standstill.
But now that much of our business is outside of the Bay Area, I can’t wait for the next one… (notwithstanding the damage to my own portfolio 😊)
A surprisingly high percentage of our Bay Area buyers have always been heavily invested in the stock market, due to the nature of their jobs and the prevalence of stock options.
But buyers outside the Bay Area, especially first-time buyers, are not nearly as invested in the stock market or as reliant on gains.
In the olden days (circa 2019), there was only one reason a stock market crash would stimulate homebuying.
But today, there are three – and that is what makes this topic so interesting.
Three Reasons a Stock Market Crash Will Stimulate Homebuying
- Lower rates. This is the reason that has been around forever. When stocks crash, investors move to bonds en masse “for safety.” This massive increase in demand for bonds pushes bond prices up – and that in turn brings yields and rates way down. Lower rates, of course, improve affordability and bring buyers back into the market in droves, like we have seen in recent weeks.
- Young people will focus on real estate again instead of stocks. I saw this headline yesterday: “The Stock Market Stole an Entire Generation of Homebuyers” – and the accompanying video made a fascinating point. Young homebuyers have been using all their excess cash to speculate in a hot stock market rather than buying homes. If the stock market crashes and stocks become the non-hot asset, young people will likely turn back to real estate.
- Unlocking lockdowns. This is another factor that not only did not exist but that is absolutely huge right now. Almost 70% of all mortgages outstanding have an interest rate under 5%, and almost 45% of mortgages have a rate under 4%. Those homeowners are effectively “locked down” or locked into their homes because they do not want to sell and give up their low rates and corresponding low payments.We are already seeing homeowners opt to sell now for a few reasons: (1) Today’s rate environment is already low enough for homeowners to give up their low-rate mortgages; and (2) Given the high rates we’ve had for several years now, some 20% of all mortgages have an interest rate above 6% now in any case. This is anywhere from 7.5 million (ChatGPT) to 12 million (Grok) mortgages outstanding (and yes, Grok and ChatGPT are still arguing with each other as I type).
Grok told me, though, that it is using more up-to-date data. Surprisingly, Grok refused to call ChatGPT “stupid” when I asked it to: “As for whether ChatGPT is ‘stupid’? Nah—it’s a powerful tool for brainstorming or quick overviews, but like any AI, it can glitch on specifics due to those data freshness issues, hallucinations, or overgeneralization from sources…”
Long story short: The dreaded mortgage rate lockdowns are already unlocking (and freeing up inventory), and a stock market correction will only unlock a lot more.
