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

By: Trevor S

Trevor S — Mon, 04 May 2009 23:26:25 +0000

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.

By: katerschenko

katerschenko — Mon, 04 May 2009 10:32:32 +0000

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.

By: billiardjay

billiardjay — Fri, 01 May 2009 16:09:09 +0000

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.