Housing Price Index – More Weakness In The Housing Market Coming?

The ECRI leading home price index is yet another indicator on the housing market which has gone negative. Higher interest rates are hurting home prices. And, the weakness in housing can easily lead to lower rates as economic growth slows.

People’s primary house is often their largest asset. This means when housing prices increase, there is a huge wealth effect that drives consumer spending.

When this wealth effect goes in reverse, consumers are going to start saving their money. The savings rate is already high, but it will go even higher if housing prices fall.

If housing prices cause economic weakness, stock prices will fall. The consumer will be faced with negative momentum for the first time this expansion.

Keep in mind, the home price leading index seen above is showing the weakest growth since 2009. The only good aspect of this decline, which should continue in the intermediate term, is housing will become more affordable.

There should be a sweet spot where the economy drives down prices and rates enough to make it a good time to buy a house. Then the situation will reverse.

Ultimately, this will be a normal housing cycle which won’t see a burst in defaults. The situation won’t be as clean for the stock market which will be faced with a spike in volatility if housing prices get worse.

Keep in mind, the latest Case Shiller housing price data shows growth is still 6% year over year. The problem is this is from July. Meaning growth has likely fallen since then. It recently peaked at 6.5% in March.

Housing Price Index – Stocks Selloff Sharply

The stock market sold off sharply on Thursday as the S&P 500 fell 0.82%. The Nasdaq declined 1.81% and the Russell 2000 fell 1.46%. The worst hit was emerging markets.

The EEM ETF fell 2.5%; it is down 5.18% since September 21st. Emerging markets are down 21.29% since January 26th. Unlike earlier in the year, this decline isn’t being caused by China as the Shanghai Composite is up 6.39% since September 17th.