Is a recession looming Indicator of financial crisis reaches extreme level
The U.S. housing market is now the latest sector indicating potential economic trouble amid ongoing uncertainty. On June 29, data from The Kobesissi Letter highlighted that the current state of the U.S. housing market closely resembles the conditions preceding the 2006-2007 crash.
According to the report, home valuations have reached levels not seen since just before the last financial crisis, raising concerns about a potential recession. The report reveals that home prices are now overvalued by 20% based on rent and 26% for homeowners, with these metrics having quadrupled in just four years.
US home price valuation chart. Source: Federal Reserve
The dramatic rise in home valuations is driven by rapidly increasing home prices, with median prices for new and existing homes nearing record highs of approximately $420,000.
Worsening the situation, the annual income required to purchase a median-value house now surpasses the median household income by a staggering $40,000, highlighting the severe unaffordability of the U.S. housing market. “The annual income needed to buy a median-value house exceeds the median household income by a record $40,000. The U.S. housing market is extremely unaffordable,” the platform noted.
The Labor Department estimates that owners’ equivalent rent began sharply increasing around 2015, peaking at over 25% overvalued in recent years. Market-based rents for newly leased homes exhibit a similar trend, slightly lagging behind owners’ equivalent rent. Current overvaluation levels surpass those seen during the pre-2008 housing bubble, indicating a precarious market position.
In recent weeks, multiple indicators have suggested a possible U.S. recession. For example, a Finbold report noted that the U.S. Leading Economic Index (LEI) has dropped by 14.7% from its recent peak in this economic cycle, a decline that has historically preceded recessions over the past 65 years.
Attention has now turned to the timing of a possible recession, with a consensus predicting it could hit in the second half of 2024. The U.S. Treasury yield curve is projecting a 52% chance of an economic downturn over the next year. The Federal Reserve’s decisions on interest rate cuts will be crucial in determining the direction of a potential recession.
