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Recession on the horizon? Financial crisis indicator enters an extreme zone

Recession on the horizon? Financial crisis indicator enters an extreme zone
Paul L.

The United States housing market is now the latest sector to signal trouble for the economy amid lingering uncertainty.

In this regard, data shared by The Kobesissi Letter on June 29 pointed out that the U.S. housing market is eerily resembling the prelude to the 2006-2007 crash.

According to the report, home valuations have now reached levels last seen just before the previous financial crisis, sparking concerns about an impending recession.

Notably, home prices are now overvalued by 20% on rent and 26% on a homeowner basis. These valuation metrics have increased by at least four times in just four years. 

US home price valuation chart. Source: Federal Reserve

This dramatic rise is attributed to rapidly increasing home prices, with the median new and existing home prices hovering near all-time highs of approximately $420,000.

Dropping household income

Further exacerbating the situation, the annual income required to purchase a median-value house now exceeds the median household income by a record $40,000. This indicates an extreme level of unaffordability in the U.S. housing market.

“At the same time, the annual income needed to buy a median-value house exceeds the median household income by a record $40,000. The US housing market is extremely unaffordable,” the platform noted. 

The Labor Department estimates that owners’ equivalent rent sharply increased starting around 2015, peaking at over 25% overvalued in recent years. Market-based rents for newly leased homes follow a similar trend, albeit slightly lagging the owners’ equivalent rent. The current overvaluation levels exceed those seen during the pre-2008 housing bubble, indicating that the market is in a precarious position.

Overall, in recent weeks, several indicators have increasingly pointed to a possible U.S. recession. For instance, as per a Finbold report, the U.S. Leading Economic Index (LEI) has plummeted by 14.7% from its recent peak in this economic cycle. This substantial decline has historically signaled the onset of recessions over the past 65 years.

In the meantime, attention has now turned to when a possible recession might hit, with a majority consensus signaling the second half of 2024. Indeed, the U.S. Treasury yield curve is projecting a 52% chance of an economic downturn over the next year.

Meanwhile, attention now shifts to the Federal Reserve regarding its monetary policy on interest rate cuts since it will be crucial in influencing the direction of a possible recession.

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Paul L.

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