Manage market volatility: more than just your portfolio

Watching the stock market’s ups and downs too closely can cause whiplash. Stock market prices fell during the pandemic, soared as the country returned to something approaching normal, and then stumbled hard on persistent news of inflation and increasing talk of recession¹.

Stock market volatility matters to many people because of the effect it has on their retirement planning and investments². But financial market volatility can have a huge impact on many people much closer to home. In fact, it can have a huge impact on their homes: whether they choose to buy, sell or rent; whether they wait out housing volatility or act quickly; and whether they buy where they are or choose another location entirely.

If you own a home or are thinking of buying one, here’s a look at how housing market volatility can affect your decisions, and whether you should stay on your financial course or plot a different direction.

Last year was a boom year for residential real estate³, and many analysts thought the same would be true for 2022. However, that was before rising inflation and the Federal Reserve Board’s response to raise interest rates. According to Reuters, new US home-building activity fell to a nine-month low in June, and permits for new construction projects fell too – signs of a cooling market⁴. At the same time, existing home sales have been falling for months, though most homeowners would still profit by selling their homes because of the equity they’ve built up, especially in the last few years⁵.

So, if you’ve been thinking of getting into or out of the real estate market, what are the variables you should consider to see how housing volatility could affect you?

First-time homebuyers might do well when housing prices fall because they might be able to buy more house than they could before. On the other hand, if prices fall in response to rising interest rates, paying a higher rate could cost tens or hundreds of thousands of dollars over the life of the loan. It’s also true that rising rates should fall eventually, and today’s first-time buyers can refinance when they do.  

Another issue for homebuyers: Even if the price of a house falls due to rising mortgage rates, the continuing costs of everything that goes with it – maintenance, utilities, repairs, and so on – might not, and those may not be the headwinds you want to face as a first-time homebuyer.

Another factor to consider as you think about market volatility is your emotional reaction. Homebuying is an intensely personal decision, and your financial and emotional needs, your family background, and the type of life you want all play a part. Trying to time the market – and the potential regret at not doing so successfully – is also a factor. Some people are eager, even anxious, to buy a home when prices rise because they fear missing out on a deal. Others buy when home prices fall because they’re betting on the market being at or near its bottom.

Millennials, in particular, have been very willing to make sudden decisions in the face of market volatility – and sometimes come to regret it. During last year’s housing market boom, millennials were very willing to buy a home sight unseen, purchase a fixer-upper that needs major repairs and offer more than the asking price. It’s these factors that played into the emotional ramifications as desperate buyers who rushed into home purchases were more likely to experience significant regret, with one in four regretting the expense of their mortgage⁶.

How do you keep from becoming one of those homeowners with buyer’s remorse? Here are some strategies to consider:

1. Talk to your financial professional. Buying a home needs to be thought of as part of your long-term financial plan. A financial professional will understand how a potential mortgage fits within your broader financial needs, goals, assets, and liabilities. Trust your financial professional when you review your financial plan, but be sure to ask key questions, particularly on how market volatility could affect your decision, or the consequences of a decision, both now and later.
2. Understand the factors that are unique to you. Market volatility can affect the homebuying market, but the reasons behind your homebuying decision will also be influenced by personal factors. Do you have a large family or anticipate starting one? Do you need to live near work or near extended family members? Are you feeling external pressure by seeing those around you making home purchases? These factors will likely continue to be valid after the next turn in the market – but maybe not. How would a loss or change of job affect you? Your personal reasons for homebuying can change too.
3. Understand and accept your appetite for risk. It’s a big factor in how you respond to market volatility. How uncomfortable will you be if home prices or mortgage rates fall after you close on a house? Keep this in mind as you decide whether, and when, to buy in a volatile market.

There are few guarantees when it comes to buying a home, of course. But taking these steps will go a long way toward helping to ensure you make a homebuying decision that’s right for you.