US home prices are still dropping - and the S&P 500 will erase this year's gains, top economist David Rosenberg says

• US home prices are dropping and stocks will come under pressure, David Rosenberg says.
• The veteran economist doubts the housing market has bottomed, as prices fell in May.

US house prices are still falling and stocks are poised to slump, David Rosenberg has warned.

"I keep hearing about how the housing market has bottomed," the veteran economist tweeted on Monday. "Yet, prices in the new and existing market for residential real estate are deflating!"

Rosenberg backed up his assertion with a pair of charts. The first, based on data from Haver Analytics and Rosenberg Research, showed the median price for new single-family homes dropped sharply in April.

The second chart, based on National Association of Realtors data, showed the median sales price for existing US homes fell in each of the past three months.

In response to inflation hitting 40-year highs last year, the Federal Reserve has hiked interest rates from nearly zero to north of 5% since last spring. Given the evidence that home prices — a key component of inflation — are declining, Rosenberg questioned why the US central bank is signaling further rate increases.

"Jay Powell — you're aware of this, right?" he tweeted, referring to the Fed's chair.

The Rosenberg Research president and former chief North American economist at Merrill Lynch also issued a caution to stock-market bulls, many of whom are giddy at the prospect of the Fed ending rate hikes.

He pointed out that when the Fed has previously lifted rates enough to invert the yield curve, the result has always been a recession and bear market. He also noted that the stock market has historically bottomed two or three years after the central bank stopped raising rates, suggesting that equities' recent comeback won't last.

"Play the market to the highs but make sure you have hedges and insurance in place," Rosenberg said. "The fundamental lows in the S&P 500 are simply not in despite this year's rally."

Echoing Warren Buffett, he complained that many investors are treating stocks as "some 'get rich' quick scheme" and the stock market as a "casino," instead of a long-term vehicle for building wealth.

Moreover, many people are betting the farm on stocks and ignoring bonds, boosting their potential upside but also exposing themselves to devastating losses, he continued.

"Bonds are a ballast in the portfolio," Rosenberg said. "You own bonds because every winning strategy needs a strong defense — an insurance policy."

"As everyone focuses on the S&P 500, the sexy centerfold in the magazine, boring bonds have never ever failed to deliver a positive total return in the year after the Fed presses the pause button," he added.

Rosenberg noted that over the past four decades, 10-year Treasuries have notched a median gain of about 13%, and always jumped at least 6%, in the year after the Fed halted it rate hikes.