Stock volatility could further weaken housing demand

Consumer confidence in housing has been on the rise all year, thanks to increasing home values and a strengthening job market. That confidence, however, may be taking a hard hit from swings in the U.S. stock market, volatility in overseas economies and uncertainty over interest rates.

"Between Greek default, war, plummeting oil prices and most recently fears of a Chinese slowdown, it's been a volatile summer. Like swimming with a bully in the pool, it seems like every time the market comes up for air, something comes along and pushes it right back down again," said Zillow's chief economist, Svenja Gudell.

Higher home prices are taking their toll on potential buyers. Consumer demand for housing fell for the fourth straight month, according to Redfin, a real estate brokerage. Its monthly demand index dropped 5 percent in July from June, but is still 9 percent higher than one year ago.

"We're starting to see buyer fatigue set in," said Redfin's chief economist, Nela Richardson, in a recent interview. "They're starting to wonder, 'is this house worth this price,' and we're seeing buyer demand, finally, after months of being over the top, starting to pull back."

Home prices rose 4.5 percent nationally in June, a slightly higher annual gain than the market saw in May, according to a report released Tuesday by S&P/Case Shiller. This is between two and three times the rate of inflation, noted David Blitzer, S&P managing director.

First-time buyers in particular have been priced out of the market, as lower-end homes see bigger price jumps and high rents stand to prevent these buyers from saving for a down payment. First-time buyers made up just 28 percent of July sales, declining for the second straight month, according to the National Association of Realtors (NAR).

"The fact that first-time buyers represented a lower share of the market compared to a year ago, even though sales are considerably higher, is indicative of the challenges many young adults continue to face," said Lawrence Yun, chief economist for the NAR.

Higher home prices are the result of very tight supply of both new and existing homes for sale. Single-family housing starts did see a strong bump higher in July, suggesting a stronger sales picture in the coming months, but Blitzer points to interest rates and stock market volatility as potential headwinds to demand.

"A one quarter-point increase in the fed funds rate won't derail housing. However, if the Fed were to quickly follow that initial move with one or two more rate increases, housing and home prices might suffer," noted Blitzer. "A stock market correction is unlikely to do much damage to the housing market; a full-blown bear market dropping more than 20 percent would present some difficulties for housing and for other economic sectors."

Consumer confidence in housing had been bolstered by rising prices, but buyers continue to be frustrated by lack of supply of homes for sale, which has resulted in slower sales. Prices may start to weaken on that slower sales pace, which combined with more housing supply would lead to more stable, healthy growth. That could change, however, with overall economic volatility.

"Positive market conditions for housing aren't the same as positive consumer sentiment, and it will be interesting to see if all this volatility causes consumers to sour and change their homebuying and selling behavior," noted Gudell.