The skyline of Seattle. Credit: Getty Royalty Free

The report last week of a 13% fall in the number of new homes sold in September (compared to the previous September) was another bit of bad news behind the 10% fall in the S&P 500 so far in October. Homebuilder stocks are down nearly 40% from last January.

Looking at the graph below of Federal Reserve Economic Data (FRED), you can see new home sales have a strong tendency to fall a year or two before recessions begin, which helps explain why so many people are interested in following new home sales.

Source of Data: U.S. Bureau of the Census and U.S. Department of Housing and Urban Development, Retrieved from Federal Reserve Bank of St. Louis. Annotations by John Wake.

New One Family Home Sales

The number of new homes sold began to fall a year or two before six out of the last seven recessions. (Home sales did not fall before the 2001 recession.) Looking at the graph again, you can see that new home sales did fall a few times without being followed by recessions—once in the 1960s, once in the 1980s and twice in the 1990s.

Case-Shiller Home Price Index

Now let’s switch from the new home market to the much larger existing home market and existing home price trends.

One of the most closely followed statistics on the strength of the existing home market is the Case-Shiller Home Price Index, which released numbers today for August. The Case-Shiller numbers are not the most current, running about…