Potential homebuyers don’t need to wait for data releases to see the bad news. They already know the housing market is increasingly unaffordable. Data only deepens their despair.

The latest report showed the trend in home prices is intact. According to CNBC: “Home prices in April saw an annual gain of 14.6% in April, up from a 13.3% increase in March, according to the S&P CoreLogic Case-Shiller National Home Price Index.”

This was the largest one-year change in the index.

home price wealth effect

Source: CNBC.

Wealth Effect Could Drive Stocks Higher

As Craig Lazarra, managing director and global head of index investment strategy at S&P Dow Jones Indices, noted: “April’s performance was truly extraordinary. The 14.6% gain in the National Composite is literally the highest reading in more than 30 years of S&P CoreLogic Case-Shiller data.”

This has obvious implications for those looking for homes. Their dream home may not be attainable in the current market.

Sellers may be excited about how much their home is worth. But that excitement might turn to horror as they look for somewhere to move to since replacing a home that they sell will be expensive.

Fortunately, there is some good news in all of this.

Those staying in their homes may be significant drivers of economic activity in the coming months.

A research paper explains that increases in home values have a specific effect on retail spending. This spending is driven by something known as the wealth effect. Economists believe that as people feel wealthier, they spend more and increase economic growth.

This research found that the wealth effect is stable over time. Consumers increased their spending by an extra 2.76 cents in response to an additional dollar of housing wealth. So, a $10,000 increase in housing wealth would lead to about $276 of additional consumption.

When home prices are soaring as they are now, and with more than 140 million homes in the U.S., the wealth effect could now be a significant driver of economic growth. Growth leads to increased earnings for companies throughout the economy. And higher earnings could drive stock prices to new highs as homeowner enthusiasm spreads.

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Michael Carr is a Chartered Market Technician for Banyan Hill Publishing and the Editor of  One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Mr. Carr is also the former editor of the CMT Association newsletter, Technically Speaking.

Follow him on Twitter @MichaelCarrGuru.