Wall Street saw some volatility on Tuesday morning, as major stock market indexes opened higher after initially having seemed likely to start on a negative note. Many investors are focusing most of their attention on the Federal Reserve, which started a two-day meeting today, at which the central bank is expected to raise short-term interest rates yet again.
One reason why indexes shifted direction was that a key piece of economic news came out at 9 a.m. ET. Economists were watching for the latest reading on home prices to get a sense of whether the Fed might choose to become less aggressive with its monetary policy moves, and the numbers were as weak as stock market bulls had hoped.
Yet long-term investors shouldn't get too comfortable with the idea that the central bank might look at home prices as a reason to slow down in its tightening efforts, because the idea that the Fed has already gone too far is based on too narrow a look at the past.
Five months of falling home prices
S&P Dow Jones Indices released the latest readings on the S&P CoreLogic Case-Shiller Indices, which measure home prices across major U.S. real estate markets. The data covering the month of November 2022 showed that home prices fell 0.6% for the national index compared to October 2022's prices. The index's 10-city composite measure fell 0.7% month over month, while the 20-city version of the index dropped an even steeper 0.8%.
November isn't typically a strong month for the market, so seasonally adjusted figures weren't quite as dour. Nevertheless, all three measures dropped, with the national index falling 0.3% from October's reading.
S&P Dow Jones Indices analysts were quick to note the continuation of downward trends for home prices. November was the fifth straight month of declines, and the national index has fallen 3.6% since peaking in June 2022. The narrower 10-city and 20-city composites have fallen even more steeply in that five-month period, posting drops of more than 5%.
The report put much of the blame for falling prices on the Federal Reserve. By moving interest rates higher, the report asserted, mortgage financing has become more onerous. Moreover, if a recession results from the central bank's tightening efforts, it would put even more pressure on would-be homebuyers that could prevent them from making purchases.
A broader context
From those numbers, market participants concluded that the Fed might be slower to raise interest rates. Housing stocks jumped, with PulteGroup (PHM 2.28%) rising 7% and Toll Brothers (TOL 1.43%) picking up 3% on the day. But that conclusion requires ignoring a lot of contrary evidence.
First and foremost, even with the big declines, home prices are still up sharply from where they were just a year ago. Year-over-year gains in home prices came to 7.7% as of November 2022. Sun Belt locations have seen extraordinary price gains, with Miami up 18.4%, Tampa higher by 16.9%, and Atlanta seeing rises of 12.7% since November 2021.
Also, annual gains in the Case-Shiller indices topped out above 20% in early 2022. It's entirely possible that year-over-year prices would have to turn negative in order to make up for that period of supersized growth. That was the case during the housing boom of the mid-2000s, during which persistent gains of 10%-plus for several years were followed by the steep drops of nearly 20% at the worst point of the financial crisis in 2008 and 2009.
Be ready for more rate hikes
This isn't the first time that investors have hoped the Fed would be favorable to their positions, and in the past, the central bank hasn't hesitated to dash those hopes. Falling home prices are a good sign that inflation might not run rampant, but that doesn't mean that the Fed won't stay aggressive in making sure inflationary pressures don't come back.
