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<\/a>On the other hand, many regarded the real estate market as more of a \u201cmy-first-roller coaster\u201d ride, offering milder, lower-risk rises and dips at a much slower pace\u2014that is, until 2008.<\/p>\n The dramatic drop that was the subprime mortgage crisis<\/a> left many dizzy, and shaken, and feeling like they\u2019d gotten on the wrong ride.<\/p>\n Even a decade later, some homeowners and investors are still uneasy about giving the housing market another go. But those fears are largely unfounded.<\/p>\n While the housing market crash may have helped trigger the financial crisis of 2008<\/a> that threatened the world economy, it was by no means the sole cause.<\/p>\n In fact, the disparity between the slow nature of the housing market\u2019s fluctuations and the faster paced stock market means that they typically have minimal impact on each other\u2014at least under normal conditions. That means if the stock market crashes what happens to real estate may be very little.<\/p>\n But the economic situation in 2008 was far from normal.<\/p>\n It seems incredible that a downturn in the U.S. housing market could have global implications. But that\u2019s what resulted during the economic disaster that reached its crisis on September 15, 2008: The U.S. government refused to bailout the Wall Street brokerage firm Lehman Brothers<\/a>. On September 29, the Dow Jones fell 777.68 points, which was at the time the largest point drop in U.S. history.<\/p>\n \u201cWith Lehman brothers, we couldn’t even fund our intraday trading. We couldn’t borrow enough money to operate and so Lehman Brothers went bankrupt,\u201d explains Florida real estate agent Brett Keyser<\/a>, who ranks in the top 1% of all active Realtors in Sarasota and Manatee Counties in total number of sales.<\/p>\n When Lehman Brothers filed the largest bankruptcy in U.S. history, it became the largest victim of the subprime mortgage crisis. The government\u2019s bailout refusal destroyed the publicly held belief that banks were \u201ctoo big to fail,\u201d and triggered a financial domino effect felt around the globe for years. But the financial crisis didn\u2019t start with the Lehman Brothers.<\/p>\n Experts examining the event after the fact actually believe the first domino fell in early 2007<\/a> when Freddie Mac backed away from buying risky subprime mortgages and a leading subprime mortgage lender, New Century Financial Corporation, filed for bankruptcy.<\/p>\n The second-most disastrous chapter (second only to the Great Depression<\/a>) in the history of the U.S. economy officially came to an end on April 13, 2011 when the U.S. Senate Permanent Subcommittee on Investigations\u00a0released its final report<\/a> on its inquiry into key causes of the financial crisis.<\/p>\n Looking back at the timeline of events can tell us what happened, but it doesn\u2019t fully explain why it happened. That answer is so complex that Harvard Law School has conducted an in-depth study of the implications of the crisis<\/a> and the resulting financial regulatory reform.<\/p>\n In order to simplify matters, let\u2019s focus in on the role that housing played.<\/p>\n In the early 2000s, the global financial situation had shifted so that the housing market was driving the world economy<\/a>.<\/p>\n This housing boom<\/a>, that peaked in 2006, was spurred on by a few key factors, including:<\/p>\n This last reason\u2014and the greed behind it\u2014is arguably the biggest cause of the housing market crash.<\/p>\n \u201cThe mortgage companies were doing no documentation loans at that time, so a lot of people were lying about their income,\u201d recalls Keyser. It was a get-rich-quick scheme. People were just buying up houses to try and turn a quick profit, and the prices were going up and up and up.\u201d<\/p>\n Those flippers artificially drove up prices so high that eventually real buyers couldn\u2019t afford to become homeowners. As demand dwindled, the meteoric rise of home prices began to fall off\u2014and with it went the profit margins on flipped properties.<\/p>\n Soon house flippers could barely break even, let alone sell for a profit. As home prices continued to drop, flippers found they could no longer afford their mortgages. As more and more defaulted on their loans, mortgage lenders found they were forced to foreclose on more homes than they could afford.<\/p>\n But why did mortgage lenders make so many high-risk loans, especially without mortgage insurance<\/a>?<\/p>\n Because they were making money on those loans by selling them to a secondary market. They were bundling the loans into mortgage-backed securities<\/a> and selling them on Wall Street.<\/p>\n Seeing that easy money in the rising real estate market, more and more stock market investors wanted to get in on the housing boom\u2014creating an unprecedented demand for those mortgage-backed securities.<\/p>\n In order to meet that demand, mortgage companies began issuing more and more high-risk, no doc loans, without bothering to check if the borrowers could afford their mortgages.<\/p>\n \u201cThe mortgage-backed securities they had been bundling up were essentially junk,\u201d says Keyser.<\/p>\n All of those stock market investors who thought that they were buying into an appreciating asset, were actually buying up bad debt.<\/p>\n When the housing market took a downturn and home prices began to dip in 2007, all of those homeowners with high-risk mortgages began to default on their loans. This led to bankruptcy for many of those mortgage companies that had sold those failing mortgage-backed securities through the stock market\u2014which led to the subprime mortgage crisis<\/a>.<\/p>\n In order to prevent the economy from collapsing completely, the government stepped in to bailout the banks with the creation of the Fannie Mae and Freddie Mac Conservatorships<\/a>. This need for government intervention led to massive economic reforms.<\/p>\n \u201cAfter the financial crisis of 2008, the Dodd-Frank Act<\/a> and a lot of other financial reform laws went into effect that essentially said, \u2018We\u2019re not going to have this happen again.\u2019 We\u2019re not going to allow these no-doc loans,\u201d says Keyser.<\/p>\n \u201cNow it\u2019s so secure, they practically want to get your blood type now before you\u2019re actually going to get a loan.\u201d<\/p><\/blockquote>\n These steps taken by the federal government are designed to ensure a housing crash that drastic never happens again.<\/p>\n Along with other reforms, the multi-pronged Dodd-Frank Act established five new regulatory offices<\/a> in the S.E.C. And the Volcker Rule<\/a> prohibits banks from conducting certain investment activities with their own accounts.<\/p>\n Thanks to those and other regulations, the stock market is no longer heavily dependent on risky real estate investment like those mortgage-backed securities.<\/p>\n It also helps that the housing market is no longer driving the economy<\/a>.<\/p>\n Unlike the economic conditions of the early 2000s, these days the U.S. economy is strong<\/a> on multiple fronts. For example, unemployment was on the rise in the 2000s, reaching over 9% in 2010\u2014by 2018 unemployment had decreased to 3.7%<\/a>.<\/p>\n The stock market has seen a remarkable recovery since the financial crisis as well. While it still has its rollercoaster reputation, it\u2019s been repeatedly making and breaking records\u2014with the Dow hitting a record high for the \u00a015th time in 2018<\/a>.With both the stock market and the housing market making independently successful recoveries, the economic relationship between the two has returned to the status quo.<\/p>\n However, that doesn\u2019t mean they don\u2019t exert a bit of influence on one another.<\/p>\n \u201cThe link between equities and housing is really quite modest,\u201d says Matthew Gardner, Chief Economist with Windermere Real Estate<\/a>.<\/p>\n \u201cBut, that said, when the stock market rises, we feel wealthier and can be persuaded to spend more money on housing. However; they are also very different. In as much as many people review their portfolios very regularly, it is almost redundant to do the same thing with our homes. Housing is shelter first, and an investment second.\u201d<\/p>\n Gardner\u2019s point is also true in reverse.<\/p>\n \u201cThe housing market can have an impact on the stock market,\u201d Gardner notes. \u201cIn rare situations when housing values decline, we are less likely to invest in equities.\u201d<\/p>\n As Gardner points out, the main impact that a strong stock market has on the housing market these days is that buyers with strong stock portfolios have more money to spend on housing\u2014which could theoretically influence a rise in home prices.<\/p>\n \u201cAny short-term correction to stocks has little, if any, impact on housing markets,\u201d explains Gardner. \u201cHowever, any systemic contraction in equities can impact housing.\u201d<\/p>\n So, when the stock market remains a strong bull market for an extended period, it may exert a positive influence on the housing market. If the stock market turned into a bear market for any significant length of time, the slow-moving housing market could also cool.<\/p>\n But that\u2019s about it.<\/p>\n Thanks to the reforms put in place (and the fact that the stock market is no longer heavily invested in bad mortgage debt), it\u2019s unlikely that any short-term correction or even more significant dip in the stock market will make such a significant impact on the housing market as it did in 2008.<\/p>\n While it\u2019s true that the stock market can influence housing to a degree, there are other financial factors that play a larger role.<\/p>\n \u201cThe two macroeconomic factors on the housing market are job and income growth,\u201d says Gardner. \u201cAs long as an area\u2019s economy is adding jobs and seeing rising wages, there will be demand for ownership housing.\u201d<\/p>\n Essentially, as long as people are employed with companies doing well enough to offer wages, they\u2019ll feel confident enough to make that 30-year commitment to a sizable mortgage debt.<\/p>\n This confidence is bolstered further by low employment numbers\u2014as people are reassured that even if they lose their current job, there\u2019s a high probability that they\u2019ll find another one in short order.<\/p>\n When you add the idea that \u201cwhat goes up must come down\u201d to the fact that the stock market keeps breaking record high after record high\u2014it stands to reason this record-breaking highs trend cannot sustain itself.<\/p>\n Along with those highs, 2018 has also seen some noteworthy lows<\/a>. If this volatility leads to a lengthy downturn in the stock market, that could negatively impact the housing market.<\/p>\n Why?<\/p>\n<\/a>The 2008 housing market crash in a nutshell<\/h2>\n
<\/a><\/a>The housing market\u2019s role in the financial crisis<\/h3>\n
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<\/a><\/a><\/a>The real relationship between the stock market and the housing market<\/h2>\n
Other financial factors that impact the housing market<\/h2>\n
<\/a>How should agents and home sellers prepare for a long-term stock market decline?<\/h2>\n