Ripple effect..... FROM WALL STREET to Silicon Valley, stock market volatility during the past two weeks is beginning to take a toll on home buyers and sellers, not to mention the real-estate agents who serve them. No matter that the effect so far has been mostly psychological, nor that the economy is so healthy that in most places home prices are still on the rise and unlikely to reverse course soon. Even in places where sales have been red-hot, such as wealthy Bernardsville, N.J., a suburb of New York, real-estate brokers are edgy. ?We?re watching with real concern,? says local broker Bob Trokan. ?Our buyers have a lot of money tied up in the stock market.?
For many would-be buyers whose fat portfolios have allowed them to nurse dreams of owning a mansion on a hill, the recent gut-churning swings in stocks have been like a double shot of black espresso. ?Most of my friends are very jittery,? says Philip Kufeldt, a Campbell, Calif., software developer who?s looking for a home in the $1.2 million-to-$1.5 million range.
But for those whose wealth isn?t entirely tied to stocks, jitters can provide a competitive edge. Mr. Kufeldt, for instance, says he pulled much of his money out of technology stocks two months ago when he felt they had reached their peak. Now, he says, he?ll be in the ?catbird seat? when he decides to make an offer on an expensive home, because jumpy bidders are dropping out ? and he?s even gloating a bit over the friends whose investment wealth evaporated last week. ?Those who were relying on ?margin power? can no longer entertain the idea of owning the sort of houses I?m looking at now,? he says.
Realtors say that the buyers most affected by the stock market?s mood swings are at the highest and lowest segments of the market. Wealthy buyers often raid their portfolios so they can dispense with a mortgage and pay cash, making them very sensitive to market meltdowns. For instance, San Francisco real estate broker Olivia Decker just lost the listing on a house with a $42 million price tag because a buyer who was willing to pay $38 million for the property last week decided he could only pay $36 million this week. ?I thought it was a respectful offer,? she said. ?Especially since he planned to tear it down.? Rather than take the lower offer, the seller withdrew the property ? an increasingly common scenario in wealthy areas as stocks fluctuate. ?Sellers are getting great prices, but they?re just not taking them,? she laments.
Entry-level buyers, on the other hand, are hurt by stock swings because they often tap into mutual funds, stocks or savings for down payments. Most other buyers, however, rely on the equity in their existing homes to cover down payments for new ones, and that?s tied more to the financial health of their local Main Street than to Wall Street. So the main effect of last week?s correction ? if that, indeed, is what it was ? will simply be to ?move the marginal people out of the home-buying market,? according to Larchmont, N.Y., real-estate agent Wayne Armstrong.
REAL-ESTATE AGENTS REACT
Although one might expect that real-estate agents would be depressed over the battering their buyers? portfolios have been taking lately, this isn?t always true. In fact, in many cities, low home inventories and fierce bidding battles have caused some real-estate agents to react to Wall Street?s slide with glee. After all, they don?t get paid unless a deal goes through, and the boom-town bidding wars have been exhausting for both them and their buyer clients.
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?Sellers have been such greedy little pigs,? says Betsy Twigg, a real-estate agent in Arlington, Va., a suburb of Washington, D.C. ?We?ve had so many situations with eight or more buyers competing on the same house; we?re sick of writing contracts that go nowhere.?
In Silicon Valley, where Internet fortunes have pushed up home values more than 20% in the first quarter of this year alone, the heat is already seeping out of bidding wars, says real-estate agent Patrick Kapowich. Before the correction, one of his clients had 21 offers on her $350,000 house, and sold for $70,000 above her asking price. Last weekend, however, about half of the dozen or so buyers bidding on another house in the same neighborhood dropped out.
Mr. Kapowich is relieved. ?Sellers were getting so belligerent that deals were becoming lopsided ? they only sold ?as is,? and would accept no contingencies and no inspections,? he says. ?Buyers were getting fed up with overheated prices and frustrated that they weren?t getting a fair deal. So if this correction softens the market, it will be a good thing.?
And it will be good news to Ken and Rebecca Hoffman, who are selling their five-bedroom home in the elite Coconut Grove section of Miami and moving to Columbus, Ohio. Although they?re thrilled at the hordes of buyers who?ve shown interest in their 74-year-old home, and expect to get their $749,000 asking price, they?re worried about what sort of bargaining power they?ll have when they try to buy a new home. ?There?s virtually nothing available in the $600,000-to-$900,000 price range,? Mrs. Hoffman says.
While it?s likely that the retreat of jumpy investors will damp home appreciation in places such as New York, Seattle and San Francisco, where high-tech fortunes and jobs are clustered, what about the rest of the country? Cambridge, Mass., economist Karl Case, author of The Wall Street Journal?s quarterly Home Price Forecast thinks ?there?s still a lot of wealth in the stock market,? and this, combined with the underlying strength of the economy, should protect home prices from tumbling into a free fall.
WATCHING INTEREST RATES
Much will depend on the direction of mortgage interest rates, which have been falling since January after a year-long rise, and which Mr. Case expects to remain relatively low. ?The Fed is nervous,? he says, referring to recent efforts of the Federal Reserve to curb inflation by gently increasing the cost of money to lenders. ?They won?t take their foot off the brake, but they won?t stomp on it either,? he predicts.
Some economists anticipate that the stock market?s volatility ultimately will benefit the real-estate market, as investors look for more stable havens for their money. ?I think we?re seeing the beginning of the end of the big bull market,? says Fred Flick, vice president for economic research for the National Association of Realtors, ?and people are going to want to invest in something tangible.? He predicts home sales, which reached about 5.2 million last year, will drop off about 8% during the coming year, and that sales of upper-end homes may suffer, but median-priced homes still will sell ?pretty well.?
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Remodeling, too, may see a boost from stock volatility, Mr. Flick predicts. Although rates for both home-equity loans and lines of credit have edged up since the beginning of the year, nationally, residential expenditures on remodeling are expected to increase by $500 million this year, according to FMI, a construction-management consulting group based in Raleigh, N.C.
For instance, attorney Jim Tomlinson hasn?t yet closed on the $270,000 Cape Cod-style house he?s buying in Arlington, Va., but he already is planning to draw about $10,000 out of his stock portfolio to make improvements. Although his stock portfolio took a big hit last week ? ?I didn?t see it coming,? he says ? he?s hoping it will bounce back before he needs to pay the contractors. ?I probably won?t take my money out of the market until the day I need it,? he says.
But for all the emotional turmoil that roller-coaster stocks have created in the housing market, some people, such as engineering consultant Kulwant Atwal, remain calm. His home in the Dallas suburbs is on the market for $1.39 million, and though he anticipates selling to stock-shocked buyers will be an arduous process, he?s not really worried. He plans to move into a much smaller, less expensive home, and any profit he makes on his old home will be gravy. And what will he do with these gains? ?Why, I?ll put them into stocks,? he says. ?Of course.?
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