Could a housing slump threaten the stock market and the entire economy?

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The scorching housing market is starting to show signs of slowing down. Prices rose to levels unaffordable for many potential buyers, and mortgage rates jumped on the back of Federal Reserve rate hikes and a spike in bond yields.

But will the housing downturn hurt the broader economy and cause the stock market to drop further? It’s not clear.

Homebuilder Lennar (LEN), whose shares have fallen nearly 45% this year, provided a dose of good news on Tuesday. The company reported better-than-expected earnings and revenue and said new home orders were up 4% from a year ago.

Lennar shares rose on the news on Tuesday. Rival builder KB Home (KBH), which will report earnings after the closing bell on Wednesday, also rose slightly.

Still, Stuart Miller, executive chairman of Lennar, struck an extremely cautious tone when describing the housing environment. It’s a “complicated time in the market,” he said in an earnings statement.

“The weight of a rapid doubling of six-month interest rates, coupled with accelerated price appreciation, has begun to cause buyers in many markets to pause and reconsider,” Miller said, adding that Lennar “began to see these effects after the end of the quarter”.

Miller said that “the Fed’s stated determination to reduce inflation through interest rate increases and quantitative tightening has begun to have the desired effect of slowing selling in some markets and blocking price increases throughout the country”. He added that “the relationship between prices and interest rates is rebalancing”.

This crisis has an undeniable impact on the entire housing industry. Online real estate brokerage Redfin (RDFN) and several other housing companies have begun laying off their employees.

Some experts hope that another housing downturn won’t wreak havoc on the economy like the bursting of the housing bubble and the collapse of subprime mortgages in 2008.

“Banks are in much better shape now, and they’re not giving loans to people with no credit or bad credit,” said Michael Sheldon, chief investment officer at RDM Financial Group at Hightower. “If there is a recession, the impact on housing could be mild. There are no longer as many imbalances as before.

Home prices also continued to soar in many markets, despite the broader market and economic turbulence.

The National Association of Realtors said in a report Tuesday that the median home price in May topped $400,000 for the first time, hitting a record high of $407,600. This is nearly 15% more than a year ago.

But sales of existing homes fell for the fourth consecutive month, according to NAR, falling 3.4% from April.

“Further declines in sales should be expected in the coming months given housing affordability issues related to the sharp rise in mortgage rates this year,” said NAR chief economist Lawrence Yun.

“Nevertheless, appropriately priced homes are selling quickly and inventory levels still need to rise significantly…to cool home price appreciation and provide more options for homebuyers,” Yun added.

But that may not mean prices will suddenly plunge – housing demand is holding up reasonably well. The problem is affordability.

“We believe the housing market is lining up to mimic the late 1970s to early 1980s when price growth stalled but did not collapse,” said Brett Ewing, chief strategist of the market at First Franklin Financial Services, in a report.

Yet many potential buyers, especially young people looking to transition from renting to owning, cannot afford to buy a home.

Yet many current homeowners who sell a property with the intention of swapping and buying another home are able to close deals. So while the housing market may start to show cracks, the foundations remain relatively strong. It may take a much bigger increase in mortgage rates to scare off potential buyers for good.

“The average property stayed on the market for just 16 days in May, marking a new record high for this measure,” Jefferies economists Aneta Markowska and Thomas Simons said in a report Tuesday after the sales data was released. of existing houses.

“This suggests that supply is still scarce and any new inventory coming to market is still moving very quickly,” they added.

Federal Reserve Chairman Jerome Powell testifies on the state of the US economy before the Senate Banking Committee. The hearing begins at 9:30 a.m. ET.

Coming tomorrow: The focus will remain on Powell as he moves on to the House Financial Services Committee.

— CNN Business’ Anna Bahney contributed to this story.

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