With the delta variant of COVID-19 spurring a rise in U.S. cases, fears about how that could affect the recovering economy led to a big stock market drop on Monday. And as nothing in the financial markets happens in isolation, if stocks don’t recover swiftly, this could affect the white-hot housing market.

The Dow Jones Industrial Average fell about 600 points, or about 1.8%, on Monday morning in what experts are calling a “significant” drop. If it bounces back up, it’s likely to just be a blip, as the market has been strong for a long time. However, if the stock market continues to decline due to uncertainty over the pandemic, it could help—and hurt—homebuyers.

The drop “is a pretty big deal,” says Tomas Jandik, a finance professor at the University of Arkansas in Fayetteville. Investors are worried about potential new lockdowns and economic restrictions as well as rising inflation.

“If the economic recovery is not going to be as smooth as expected, the stock market is going to continue being very volatile,” says Jandik.

But markets often fluctuate, so experts believe there’s no reason to panic just yet.

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“The housing market doesn’t follow the ups and downs of the stock market,” says Manhattan luxury real estate broker Donna Olshan. “It doesn’t swing in volatility on a day-by-day basis.”

The upside for the housing market is if the volatility continues, mortgage rates are likely to fall. That could be a boon to homebuyers grappling with record-high real estate prices. However, it could spur even more competition for the limited number of properties for sale.

Rates hit record lows at the beginning of the year before beginning to rise as the economy started recovering. While still at historic lows, they were forecast to move up this year to the mid-3% range. (Rates were 2.88% for 30-year fixed-rate mortgages in the week ending July 15, according to the latest Freddie Mac data.)

“The wild thing in all of this [is], mortgage rates are likely going to go a lot lower than they are today,” says Ali Wolf, chief economist at building consultancy Zonda. “This could mean housing could hold up better than the wider economy.”

However, a prolonged period of stock market struggles could hurt the upper end of the housing market, as wealthier buyers have much of their money tied up there. Even middle-class buyers may be counting on selling stock to come up with a down payment. If folks are worried about their portfolios or their investments are dwindling, they’re less likely to buy.

“A slowing stock market puts people on edge, and it makes them nervous about what’s around the corner for the economy,” says Wolf. “That kind of uncertainty can cause buyers to pause or sit on the sidelines.”

If fewer people are buying, the housing frenzy could die down, taking “some of the wind out of the sails of the housing market,” says Realtor.com® Chief Economist Danielle Hale.

Why a stock market drop could lead to lower mortgage rates

There’s no simple explanation why changes in the stock market lead to changes in mortgage rates.

Basically, when investors get spooked, they tend to pull money out of the more volatile stock market and put it in boring, but more stable, bonds offering lower returns. They also often look to mortgage-backed securities, aka mortgage bonds. When more folks are buying up bonds, prices go up.

When lenders make a mortgage, they typically don’t want to keep it on their books because that means less money is available to make new loans. So they sell the loans, which are are bundled together into securities, in the secondary market.

Since mortgage rates are the inverse of bond prices, when bond prices are up, mortgage rates go down.

“Investors appear to be shifting out of stocks and into bonds in an effort to reduce their risk,” says Hale. “It means mortgage rates are likely to go lower.”

But because the housing market is so juiced right now, with prices continuing to rise by double digits, some investors are worried real estate could be in a bubble. (It’s probably not, as there are more buyers than homes for sale—the exact opposite problem of the last housing bust.) This could keep them from investing too heavily in mortgage bonds, keeping mortgage rates from sharply decreasing, says Hale.

How stock market woes could affect the luxury real estate market

However, if the stock market is down, fewer people have the money to buy homes. That’s particularly true of wealthier buyers or those looking for second or even third homes. It could even mean some folks, financially dependent on the health of the stock market, have to trim their budgets.

“People are more likely to buy a luxury property or an additional home when they feel wealthy,” says Manhattan luxury real estate broker Donna Olshan.

A resurgence of COVID-19 cases could deal the hardest blows to real estate in the larger, more expensive cities, the ones that had begun recovering from the pandemic.

During the worst of the pandemic, renters and homeowners in places like New York and San Francisco left their expensive pads to stay in second homes, live with family members, or move to new cities. That led sale and rental prices to fall, dramatically in some areas. Yet, as vaccines became more widely available and stores and restaurants began reopening, residents returned, new people began moving in, and prices started rising again.

“We are dependent on the outcome of the virus,” says Olshan. “If we go back to [peak] pandemic conditions, it affects everything. … We can’t count on the global market returning to Manhattan if the delta variant conditions get worse.”

Will the stock market rebound?

Nobody ultimately knows which direction the stock market will head next—although there are plenty of pundits out there who tell devotees they do. However, many experts say folks shouldn’t worry after just one day of declines.

Typically, the stock market is strong when the economy is strong. That hasn’t been the case during the pandemic as the market has been barreling full speed ahead even as the economy suffered during the pandemic.

“Stock markets have increased so dramatically over the last year [that] I’m surprised by how much investors have been discounting the likelihood of any speed bumps on the road to recovery,” says finance professor Jandik.

He expects the market to remain volatile in the face of the unknowns involving the delta variant and inflation. It could even correct, but he doesn’t expect a full-blown crash or a catastrophe reminiscent of the Great Recession.

Even if the stock market falls, many investors will be cushioned by the market’s previously strong performance. And experts don’t expect a drop in the stock market to lead to another housing bust or even a big run-up in home prices.

“The size of the drop in one day is big, but we’re still very close to all-time highs” in the stock market, says Realtor.com’s Hale. “In order for it to really have an effect, we’re going to have to see declines of this size for several days. One day of this isn’t enough to derail what we’re seeing in the housing market.”

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