WASHINGTON — When the stock market loses $2 trillion in five days and threatens continued volatility, should homeowners, sellers and buyers begin to worry about possible side-effects on real estate?
What happens to soaring home values when a highly inflated stock market loses more than a third of its value from its peak in the span of a month?
Is there a connection between stock-enriched buyers' willingness to pay spiraling prices for homes and the performance of the stock market itself?
And could inflation worries in the economy overall--the apparent trigger for the massive mid-April sell-off--eventually cut into the big gains in home resale values experienced nationwide during the past two years?
Good questions, and they're definitely on the minds of people who sell and buy houses. Here's a quick look:
* When the stock market loses a big chunk of its value, do home values suffer?
The statistical evidence suggests that in geographic areas that are heavily dependent on stock market-derived wealth, busts in market bubbles can indeed help pull home values down.
Take the case of two hot housing markets of the mid-1980s with heavy connections to Wall Street, the bedroom suburbs of New Jersey and Connecticut. The real estate aftershocks that followed the "Big One"--the market crash of Black Monday, Oct. 19, 1987--continued for extended periods.
According to quarterly data compiled by the Office of Federal Housing Enterprise Oversight, the New Jersey housing market, dominated by the populous northern suburbs near New York City, peaked statistically in the months immediately after Black Monday. Home values slipped through the rest of the decade and hit a low in the fall of 1991.
Compounding the slide in values were widespread job losses in the financial services and stockbroker sectors. Many of the people who had had plenty of extra money to spend on houses in 1986 and early 1987 not only didn't have extra money, they didn't have jobs.
The effect was more pronounced in Connecticut. After Black Monday, Connecticut homes went into a slow downward glide that has been reversed only in the last few years in the high-cost southern suburbs bordering New York.
But, you say, Black Monday was a more intense shock to the economy--and investors--than mid-April's tailspin. Are there likely to be real estate side effects anywhere from a bust in the high-tech Nasdaq, assuming a bear market prevails for six months or more?
Absolutely. Wherever you've seen stock market-derived high-tech wealth inflating home values, any major correction in stocks eventually will be expressed in what people can pay for homes.
For the moment, that effect would be concentrated in the upper limits of the luxury markets in Silicon Valley, portions of the Northwest, northern Virginia and possibly suburban Boston.
The rationale is straightforward: When the $5 million you thought you had in your dot-com or biotech company's stock shrivels by 85%, you're a lot less likely to spend anything on that big custom mansion you'd planned to build. You're also less likely to sell your current home for an outlandish asking price.
What about the effect of a stock market bust on home values below the super-luxury category in high-tech-driven local economies? It's likely to be little or nothing, unless employers begin laying off large numbers of workers. That's when you begin to really worry about home values.
* What about the potentially insidious effects of inflation in the consumer price index on home values nationwide?
Home resale prices are not part of the Bureau of Labor Statistics' consumer price index, but if they were, the index could be even higher than it was in the mid-April report that triggered the sell-off.
The most recent study of resales by the Office of Federal Housing Enterprise Oversight found that year-to-year inflation in the average home across the country was more than half a percentage point per month--a sizzling 6.4% for 1999 overall.
The "core" consumer price index for last month, a measure watched intently by the Federal Reserve Board in determining its future interest rate policies, rose by 0.4%. The overall index, which includes volatile gasoline and other energy prices, jumped by a worrisome 0.7%.
What has hurt home sales and resale values historically far more than stock market movements is interest rates. If the Fed sees inflation moving up ominously, look for multiple increases during the coming months in the key interest rate it charges member banks. That, in turn, will inevitably raise home mortgage rates.
The cost of money, what it takes the potential purchaser of your house per month to be able to afford to buy it at the price you're asking, is a far more potent determinant of your real estate's value than any implosion in high-tech stocks.
Worry more about inflation and interest rates than a tulip-bulb bust in dot-com land.