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Will US Home Prices Fall If Stock Market Continues To Decline?

This is a syndicated repost courtesy of Confounded Interest – Online Course Notes For Financial Markets. To view original, click here. Reposted with permission.

The US stock market has been pounded hard since The Federal Reserve raised its Fed Funds Target rate on December 16, 2015. Crude oil prices, a measure of demand for the global economy, has sunk to under $31 (WTI).

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There is little doubt that The Fed was blowing bubbles with their ZIRP (zero interest rate policy). Both the S&P 500 index and US home prices have risen considerably since the Fed intervention in 2008 (although home prices didn’t begin raging until 2012).

As with any asset bubbles, a rise in the stock market increases the wealth effect. The greater the wealth effect, the more likelihood that the additional wealth can be used to purchase housing.


The stock market has cooled since the end of 2014 when The Fed ended QE3. But will the housing market (and home prices) cool as well?

The good news is that we are seeing gently rising mortgage purchase applications (orange line) even though real median household income fell (again) in 2014. Either real median household income rose in 2015 OR mortgage credit has eased.

Yes, residential mortgage credit is easing … again.


The usual lineup of suspects (Mark Zandi, Bill McBride at Calculated Risk, Dave Stevens at MBA, etc) are saying that 2016 is going to be a wonderful year for the economy and housing market. I hope that it true (I have three children). The GDP forecast for 2016 is 2.5% (although it was higher before crude oil prices got slammed).


Particularly since Q4 2015 GDP growth now stands at 0.8% (according to the Atlanta Fed’s GDP NOW forecast tracker). this would be welcome news and would likely result in higher residential mortgage rates in 2016.

There are a number of economic wildcards that could scuttle a 2.50% GDP growth and continued home price growth — continuing decline of China and Russia’s economy, a sputtering Europe, further decline in crude oil prices, Middle East political turbulence, etc.

Remember,a 2.50% GDP forecast is a point forecast. The variance around that forecast could be huge. And there is always a possibility that The Fed will intervene again.

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