A red flashing light in the housing market could spell trouble for the economy

The U.S. economy is growing at a healthy pace, the labor market is its tightest in years and consumer confidence hasn’t been this high since 2000.

But one warning sign of trouble could be flashing in the housing market, according to forecaster Lakshman Achuthan.

“Our leading home price index has made a downturn that it hasn’t made in a long time,” Achuthan, co-founder of the Economic Cycle Research Institute, told CNBC’s “Trading Nation” on Wednesday. “The last time it was this weak … was in 2009 coming out of the last recession, and this leading index in 2006 really did call the housing bust.”

ECRI’s U.S. leading home price index turned negative last April. The S&P Case-Shiller home price index is not yet negative but is decelerating. In July, national home prices in 20 cities rose by an average 5.9 percent, its slowest pace in 10 months. Sluggish income growth and rising mortgage rates have depressed demand and prices.

“I wouldn’t say there’s a housing bust here now, but directionally we have a home price growth downturn,” Achuthan said. “For the overall economy, we have a yellow light. We think there’s a slowdown that’s happening here but on the housing and home price growth, absolutely it’s a red flashing light.”

Falling home prices are not just a problem for the housing market; they could easily spill over onto the broader economy, he said.

“The link really goes through the wealth effect,” he said, referring to the behavioral economic theory that consumer spending increases when perceived wealth increases. Declining asset prices such as real estate have a negative wealth effect.

“Instead of being a wind at the back of the consumer and consumer confidence, it’s now more of a headwind going forward. It remains to be seen just … how sharply this can fall, but the direction we have is clear,” he said.

Rising stock prices could offset some of the negative effects of falling home prices, at least at first, he added. The Dow hit an all-time high as recently as Wednesday.

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