The stock market has been particularly volatile lately, and there are many predictions of another large “correction” that could come any day now.
Here are a few considerations in regard to a stock market correction, at least as they relate to real estate and mortgages.
A stock market “correction” is defined by The Motley Fool as a drop in stocks of 10% or more.
The Motley Fool actually has a great article called Six Things You Should Know About a Stock Market Correction that really puts things in perspective.
Among other things, the article points out that corrections are inevitable and often short-lived, and that they only really matter to short-term traders.
For more perspective, the S&P dropped about 7% in October, while the Nasdaq dropped about 9%.
While those are real numbers, it is also important to remember that the S&P is still UP 21% from January of 2017.
Also, while we are seeing big movements lately with respect to “point drops,” e.g. Dow dropped 832 points on Oct 10th, the recent drops are not that large in percentage terms (832 points is about 3% of the Dow Total).
In October of 1987, in contrast, the Dow fell almost 22% in one day. In the famous 1929 stock market crash, the Dow fell almost 13% in one day.
EFFECT ON POTENTIAL HOMEBUYERS
Sharply falling stock prices often paralyze homebuyers for a few reasons: (1) They are not sure they should make major investments in anything during what they think are precarious economic times; and (2) They don’t want to liquidate their stocks when prices have just fallen.
There are benefits from a correction, however, as well as workarounds, including falling interest rates, margin accounts and smaller down payments.
EFFECT ON INTEREST RATES – “FLIGHT TO SAFETY”
When stock markets take a hit, there is usually a major “flight to safety.” “Flight to safety” refers to when investors move money en masse from stocks into “safer” investments like bonds. The massive increase in demand for bonds often pushes rates much lower, depending on the size of the correction and the amount of money moving to bonds. This in turn can create great opportunities to lock in lower rates that are often as short-lived as the stock market corrections themselves. This is something jittery buyers should be aware of after corrections.
Most of our well-heeled buyers are aware of this option, but when buyers have funds in the stock market that they do not want to liquidate b/c of a fall in prices, they should consider a margin account. This is an account the buyers set up with their brokerage, in most cases, that allows them to borrow up to 50% of the value of the stocks held within the brokerage. Buyers can borrow their down payment funds in the short term and then either pay back the margin account over time or liquidate stocks later on (to pay back the account) when prices rise again.
HELOCS and SMALLER DOWN PAYMENTS
Buyers who do not want to liquidate stocks in a down market can also consider putting less money down. We have Home Equity Line of Credit (HELOC) or 2nd Mortgage lenders that loan as much as $250,000 up to 95% loan-to-value, and as much as $350,000 up to 90% loan-to-value. We also have jumbo lenders that allow borrowers to put down as little as 10% for purchases as large as $2 million. Buyers opting for the HELOC/2nd Mortgage option can pay off their HELOCs later on when stock prices come back up and buyers feel comfortable liquidating their accounts.
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