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Posted On February 13, 2018
The Dow Jones Industrial Average tracks stock price fluctuation of thirty major American companies and is used to gauge general market conditions. Last Monday, the Dow Jones saw some steep declines, setting a record for the most points lost in a day, though in the past it has seen larger losses by percentage. The stock market is known for its volatility, and just one day after the plunge, the Dow Jones closed over 500 points higher. How do falling stocks affect mortgage lending?
Since the election of President Trump, the Dow Jones has risen 40% and hit numerous historic milestones. Earlier this year, it set another record high, breaking 25,000 points. Last week’s sharp sell-off was triggered by a mix of inflation fears and imminent interest rate hikes. January’s strong jobs reports showed a decrease in unemployment levels and an increase in average wages, supporting the cause for another rate hike soon. The Federal Open Market Committee (FOMC) raised the benchmark interest rate three times last year and these rate hikes will influence lending in terms of mortgage rates.
Overall, the stock market does not have an immediate impact on the mortgage market. Both markets are influenced by foreign and domestic economic trends and the Central Bank. Thus, last week’s sharp sell-off will not have a lasting impact, unless the volatility continues. Most stock market investors are in consensus that last week’s volatility is just a reaction to upcoming rate hikes. Comparing the fall with months of historic gains, the decline looks more drastic. Realtor.com senior economist, Joseph Kirchner explained, “the types of corrections we are seeing this week in the U.S. stock markets are not expected to negatively impact the housing market unless the current volatility causes the market to significantly fall below normal levels.”
Home buyers or real estate investors who were expecting to buy with stock market proceeds may see a more direct impact from last week’s decline. A Realtor.com survey of consumers looking to buy in the next year showed 52% of prospective home buyers planned to use stock market proceeds toward their home purchase, and of that sample, 90% cited recent stock market strength as the reason for that decision.
If stock market volatility continues, the FOMC may reduce the number of rate hikes in 2018. Last week, market analysts decreased the probability of a March rate hike from 78% to 69%. With Trump’s pick for Federal Reserve Chair Jerome Powell now at the helm of the Central Bank, more hawkish policy moves might start to take place.