The Economic Cycle Institute, which has been predicting a slowdown in the American economy since late 2017, released their home price leading index which shows similar bearishness. The housing market is the weakest part of the economy. Since American’s primary home is often their largest asset, a decline in prices will have a severe impact on consumer sentiment which is at one of the highest points ever. The chart below shows the leading home price index growth has gone negative. It is showing its worst reading since 2009 when the economy was coming out of the housing bust.
Source: chart below
Weakness in the housing market is a red flag for the overall economy because housing generates a huge wealth effect when prices rise and causes consumers to be cautious and save more when prices fall. You might be asking how consumer sentiment is still near its record high if the housing market is so weak. The reality is it isn’t weak yet. The leading indicators signal it’s about to get worse. Being the worst part of the economy doesn’t mean it’s a disaster because the economy is strong. Year over year home prices are still up. The S&P Case Shiller Home Price index is up 6% year over year as of July. Growth recently peaked at 6.5% in March. Based on the more recent data on the housing market, it wouldn’t be a surprise if growth fell further in August and September.
Interest Rates Are A Problem
The lack of home affordability will catalyze the decline in home prices. Barely positive real wage growth this summer doesn’t equate to rapidly rising housing prices. The good news is as housing prices fall, housing will become affordable again. The new problem is interest rates are rising which is making housing even less affordable. As you can see from the FRED chart below, the 30-year fixed mortgage rate increased from 3.85% last year to 4.71%. Rates are the highest since 2011.
