Know Which Economic Events to Worry About and Why
This article was written for and originally published on Inman News.
It has been a summer of see-sawing.
The first market shock began with the surprising decision by U.K. votes to leave the European Union. After the vote in the U.K., fears of what Brexit would bring immediately took hold.
The pound sterling plummeted in value, and the media sprung into action predicting doom. U.S. stocks fell, and hand-wringing investors wondered what would come next.
Within a week, stocks started to stabilize. The last day of the second quarter capped a three-day recovery from the post-Brexit sell-off, and the Dow Jones industrial average rose nearly 1.4 percent for the quarter as the S&P 500 rose 1.9 percent.
The world and the U.S. still haven’t sorted out exactly what the Brexit vote will mean for the global economy, but this type of dramatic reaction and recovery is nothing new; in fact, it’s a trend that seems to be on the increase, especially since 2008.
The stock market has become less of an indicator of the health of companies or the economy and more of an index of emotional sentiment.
Part of the problem is that it can be hard to know what will be a disaster and what will be a flash in the pan. Some market shocks are short; others, such as the Lehman Brothers bankruptcy, touch off longer and more systemic cycles which take longer to recover.
When trying to time the sale of a property, market shocks can be disheartening, but it’s important to remember that real estate is by its nature is illiquid and follows slower cycles.
Panic Is Pointless
It’s natural to react to dramatic events and start predicting worst-case scenarios, but panic serves no one. In the stock market, playing the short game and reacting to blips in the market generally is not a strategy for long-term growth.
A year ago, fears over a deflated Chinese economy bubble began; however, China’s GDP continues to show growth, and what some called a deflating bubble may actually be the shifting and maturing of the country’s economy.
“Don’t time the market, time your life,” is a phrase said over and over in the stock market arena, but it applies to real estate as well.
Look to the Fundamentals
For those prone to panic, it’s important to develop a mindset of resilience; this comes from taking a look at the deeper fundamentals at work in the market. The market shocks that have depth are ones that are part of a larger systemic issue.
Even then, the smart money keeps an eye on the long term.
There’s a difference between market shocks, when the world reacts dramatically to a single event, and market shifts, which are slower and longer lasting.
Also, correlation is not causation. For example, there’s been much speculation over the effect of an election year on real estate.
This year’s overall market is predicted to rise 3 percent, less than the last two years, but that has more to do with where this year falls in our cycle than with the impact of the election.
The luxury real estate market recovery has already happened. Now what we are starting to see is a bifurcated market, where entry-level pricing continues to rise at a rapid rate and buyers are constrained by lack of inventory, while at the high end, prices are stabilizing and inventory is sitting on the market.
A recent study from Zillow showed values in the top third of the market rose 4 percent in May from a year earlier, while prices for the least-expensive houses rose 8 percent.
Hope for the Best, Prepare for the Worst
Every smart business person uses a multi-prong strategy. A mindset of resilience comes building your adaptive capacity and from knowing that you don’t have just one weapon in your arsenal.
Some of the most successful startups, including Pinterest and Airbnb, have embraced what is called the “pivot,” a fundamental shift in business strategy.
Pivots start by taking a realistic look at the situation and taking action if things aren’t going as predicted.
If you list your property, and it isn’t selling, digging your heels in and hoping for the best might not be the best course of action. You can either decide to change course now or in two years.
In the short term, global uncertainty might be good for real estate in the U.S. as some investors seek a safe haven in the U.S., as NAR Chief Economist Lawrence Yun has said.
A weakening pound and euro also strengthen the U.S. dollar and push mortgage rates down. Low interest rates have been the order of the day as Janet Yellen continues to not see economic indicators to prompt an increase.
Fannie Mae Chief Economist Doug Duncan said, “The Fed will very likely be on hold for some time as it observes the impact on U.S. and global financial markets and economic activity.”
It’s too early to predict either the long-term fallout of Brexit, the vacillations of the stock market or the way the real estate market will turn in the wake of the Presidential election. We likely haven’t seen the last of the type of market shocks that create wide swings in value.
It’s important to stay calm when market starts to become more volatile.
You have a better chance timing your life than timing the market.
Global uncertainty can be good for real estate in the U.S.