By David F. Seiders. The single-family housing market has performed quite well during the massive contraction in the stock market that began in the spring of 2000. That's not because weakness in stocks, per se, is good for housing; indeed, history shows that large losses of wealth in the stock market normally weaken the demand for homes.

The key saving grace in this episode has been a world-class decline in interest rates that accompanied the stock market collapse. The terrorist issues that erupted on Sept. 11 also appeared to bolster housing demand, by focusing attention on fundamental values of hearth and home. Resilient demand for homes, in turn, provided strong support to house prices, and homes quickly became the preferred investment alternative for millions of Americans--further bolstering sales and prices.

But it hardly seems possible that the housing market has totally escaped damage from the huge stock market losses that have accumulated. Anecdotal reports show slowing sales and softening prices at the upper edge of housing markets in various parts of the country, and there's a lot of concern that this softening process will filter down to the rest of the market.

NAHB survey

In November, the NAHB surveyed approximately 300 builders about the impact of the stock market decline on the single-family housing market at various price points. The results show that, on balance, builders believe the stock market decline has had a net positive effect on sales of homes priced under $200,000 during the past year (38 percent said the effect was positive, while 27 percent cited a negative effect). This result was driven by a perceived surge in buyers' perceptions of homes in that price range as good investments; in fact, three-fourths of builders said that the investment incentive had strengthened during the past year. Buyers in the lower home price ranges naturally have absorbed relatively little of the losses in the stock market while witnessing both the decline of stock prices and the systematic rise of house prices in their ranges.

At the high-priced end of the housing market ($1 million or more), builders perceive a strong net negative impact of the stock market decline on home sales (72 percent view the effect as negative while only 12 percent see the effect as positive). Furthermore, only about half of the builders think that buyers' perceptions of homes as good investments have strengthened in the million-plus price range, while one-eighth think the investment incentive actually has weakened for high-priced homes. Prospective buyers at the high end of the housing market presumably have relatively large exposure to the stock market and apparently have perceived some house price weakness at the upper edge.

Bottom lines

Builders view the stock market decline as a mixed blessing for the single-family housing market, with net positive effects at low price ranges and net negative effects at the high end. This perception squares with reports of soft sales and prices at the high end in the midst of a generally robust single-family market. It's also clear that softness at the high end is not filtering down to the rest of the market. Quite the contrary!