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Stalling Home Sales Could Spell Trouble for Stocks

One of the surest signs of economic hope over the last few years has been the recovery in the housing market. Fueled by new- and existing-home sales and increased construction, stocks have rallied to all-time highs. On Friday, the S&P 500 (SNPINDEX: ^GSPC  ) closed at 1,759 points.

However, recent figures are starting to cast doubt on the sustainability of the recovery. In the first case, new-home sales have begun to lag.

The Commerce Department reported that sales of newly constructed homes fell by a precipitous 14% in July. And while they made back some of the ground in August, they're nevertheless well below their seasonally adjusted annual rate from the preceding six months.

Added to this, the National Association of Realtors reported last week that existing-home sales, which outnumber new-home sales by a factor of 10, are now trending lower as well.

For September, the seasonally adjusted annual rate of previously owned single-family home sales dropped by 1.5% compared with August. It was the second month in a row in which they've declined.

It's worth noting that this trend wasn't much of a surprise and that it's expected to continue.

"Affordability has fallen to a five-year low as home price increases easily outpaced income growth," NAR's chief economist Lawrence Yun said. "Expected rising mortgage interest rates will further lower affordability in upcoming months. Next month we may see some delays associated with the government shutdown."

So, should these trends concern you? Are they a harbinger of things to come in the stock market?

On the one hand, it's silly to argue that the recent trend in the housing market isn't an issue. Roughly one in five mortgagees is still underwater on their home -- a figure that's been improving along with the housing recovery. This impacts consumer confidence which puts downward pressure on consumer spending.

On the other hand, however, the underlying dynamics in the housing market are still bullish. Most notably, the current inventory of previously owned single-family homes for sale, at 5 months, is still well below the 6-month benchmark. This suggests that prices still have room to increase.

How will these positive and negative forces play out? That remains to be seen, but investors would be wise to keep a close eye on them.

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