By Doug Katz – 06/14/2022
In a recent interview, billionaire Lee Cooperman made these observations about the markets. “It’s a bear market,” he said “We’ve gone through one of the most speculative periods I’m aware of: SPACs and all that kind of crap that was going on. Crypto, and NFTs…I think it will be unlikely to go back into a bull market anytime soon.” Nowhere does he mention housing or mortgages, but this is not a divorced from or independent of housing. I have been writing a ton lately about rates and housing, but not a lot about the relationship between these markets and the equities markets.
Before delving into this relationship, it is important to once again look at psychology. Everyone with a portfolio of stocks and bonds, regardless of whether retirement or just plain investment, gets regular statements, so they see how much they have and whether it is up or down and how much. Their feeling of wealth and contentment that they can handle a large purchase like a home is directly tied to this. A significant market drop erodes this and they can and will curtal their plans as they feel less comfortable. When these changes are very pronounced like at the end of a cycle, the impact is amplified. Not only do they see large numbers but they see a constant barrage of media coverage. As would be expected, they mentally pull back and delay these purchases. Out of greed and fear, fear wins under these circumstances.
Beyond the psychological impact, there is the actual loss of value. Very few prospective borrowers have huge amounts of cash sitting on the sidelines. Many use investments and retirement assets for the down payment. When these drop there is simply less top use for the transaction. Additionally, they do not want to sell at a low point because the loss of value becomes permanent when an asset is sold. Even if they overcome the psychological barrier of selling, the reduction in assets has the potential to derail plans for retirement or other upcoming needs like college for a child. In short, there is not enough money to do everything and non-essential actions, such as a a home purchase gets out on hold.
So as you read the reports about large single digit and even double digit forecasted drops in the equities markets, you should understand that this is yet another headwind to the housing market and that it is not one but a combination of factors that will hasten the housing expected correction. Later in the interview, Cooperman references a potential 40% drop in the S&P. This would be a $40,000 drop on the value on investments in an index fund tied to that index. Potential buyers will hold back when they see numbers like that.