April 28th, 2009

Why does a slowdown in existing home sales affect the stock market?

Sine Language asked:


People need places to live, so if existing homes are not selling then it seems to me people are just renting more, changing jobs less, and possibly will invest more in home imporvement, so the ways money is spent and the beneficiaries may shift, but the net affect on the overall market would be negligible?

I can understand new home sales a bit better, but even then i would think that would affect mainly construction-related companies and mortgage finance related companies, not the broad market.

What relationships am i missing?

This entry was posted on Tuesday, April 28th, 2009 at 12:57 am and is filed under Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

3 Responses to “Why does a slowdown in existing home sales affect the stock market?”

  1. billiardjay Says:
    May 1st, 2009 at 6:09 am

    Housing sales is considered one of the leading indicators of economic activity. It is also an indicator of consumer confidence.

    If there is a downturn in a “leading indicator” such as housing sales, it portends a downturn in overall economic activity at some point in the near future. Why this is so is still up for debate, but history shows it to be a valuable predictor of economic trends.

    Since the markets are at an all-time high (and investors fear that they are overvalued), anything that points to a potential weakness in the economy will understandably cause a bit of a sell-off.

  2. katerschenko Says:
    May 4th, 2009 at 12:32 am

    A slow down of home sales signifies that demand is falling and supply has increased which causes a drop in average sale price.
    Consumers who have used equity release to fund home improvements and buy new cars are withdrawing or having problems repaying debt as interest rates have increased.This spills over into the stock market as consumers spend less which means companies earn less and thier profits are lower.
    Liquidity dries up and spending goes down.

  3. Trevor S Says:
    May 4th, 2009 at 1:26 pm

    The issue is one of liquidity. Investors are frightened that a liquidity crisis brought on by the artificially-low interest rate housing boom and the subsequent sub-prime debacle will bring an end to a liquidity-based financial expansion.

    I’ve read a variety of articles on this topic over the past year or so; but here’s one that I read just a few moments ago that was written in response to yesterday’s meltdown.