The Economic Cycle Research Institute (ECRI) is considered to be a leader in economic forecasting in this country. In fact, the ECRI Leading Home Price Index called the housing bust in 2008.
The ECRI’s co-founder, Lakshman Achuthan, reminded us that its Leading Home Price Index for the US turned negative last April of this year. Achuthan said, “The last time our Index was this weak…was in 2009 coming out of the last recession.”
Corroborating ECRI’s Leading Home price Index is the S&P CoreLogic Case Shiller Home Price Index in July 2018. The S&P Index was not negative, but it was definitely decelerating. Home prices in CoreLogic’s 20-city index rose by an average of 5.9%^, the slowest pace in 10 months. CoreLogic’s analysis points to sluggish income growth and rising mortgage interest rates as having depressed both demand and prices.
Let’s go back to forecaster Achuthan. “I wouldn’t say there’s a housing bust here now but, directionally, we have a home price growth downturn. For the overall economy we have a yellow light…for housing and home price growth, absolutely, it’s a red flashing light.”
Achuthan sees the red flashing light for housing and home price growth as problems that would well spill into the larger economy. When consumers worry that their perceived wealth is decreasing (and perceived wealth is often tied to their now decreasing home values), they decrease their spending. Decreased consumer spending is a problem for the economy.
“Instead of it being a wind at the back of consumers and consumer confidence,” said Achuthan, “now, it’s more a headwind going forward. It remains to be seen just…how sharp this decrease can fall, but the direction we have is clear.”
Of course, rising stock prices can offset some negative effects of falling home prices but after the market’s biggest drop since 2011 on October 10, it’s difficult to say how much offsetting the stock market is able to do.
