Recent collapse in home sales is a warning sign for the Stock Market.
In this article, I wanted to bring up the current state of the housing market and how it’s affecting the US economy. The housing market has been incredibly strong since 2009, contributing to the overall economic growth and bull market we’ve experienced in the last decade. As people saw their home values rise, they felt richer and are more likely to increase their spending in other areas.
The Federal Reserve’s monetary policy since 2009 has kept interest rates near zero, which has helped propel the housing market into a price bubble. Although there’s no evidence of excessive risk-taking in the mortgage debt market like in 2008, rising home prices have been a significant part of the economic environment.
Mortgage rates and home sales are closely related. When mortgage rates go up, home sales tend to go down, and vice versa. Recently, mortgage rates have been rising while existing home sales have been collapsing. This is a concern because home sales are a leading indicator of the economy, and if they continue to decline, the economy is unlikely to remain strong.
Historically, when there’s weakness in the housing market, it eventually feeds into S&P 500 earnings, taking the stock market lower.
For example, in 2007–2008, the housing market was collapsing, leading to a topping pattern on the stock market that eventually crashed in 2008. This shows the strong correlation between the housing market and the stock market.
Currently, home sales are collapsing, indicating economic weakness ahead. Although there’s been some recent economic strength in the data, the general direction of reported earnings is negative. The market has been rallying because of the expectation of a Federal Reserve pivot, with many hoping for a pause in rate hikes. However, the Fed is unlikely to cut rates, which would be necessary to strengthen the housing market.
In conclusion, the housing market is a major leading indicator of the economy, and the recent collapse in home sales is a warning sign of economic weakness ahead. Reported earnings are expected to go down, and the market may not be sustainable in the near term. It’s essential to keep an eye on the housing market and how it’s affecting the broader economy and the stock market.
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