Meet Kevin: An Ugly Warning to Everyone
Investors are braced for a recession. That’s partly due to the first quarter GDP numbers, which showed a surprise decline. And it’s also based on trends like the current high inflation and rising interest rates.
But some new data coming out indicates where markets could face their biggest drop next. Unsurprisingly, the combination of rapidly-rising prices over the past few years and rising interest rates could hit housing hard.
Existing homeowners, locked into low-rate mortgages, have a perfect hedge against inflation now. But those who have been buying homes as hedges have driven up prices. Now, the price-to-rent ratio is approaching a level last seen in 2006.
That coincides with the peak of the housing market in the last cycle. And it indicates that housing is set for the next drop. Given slowing home sales and soaring mortgage rates, prices will likely drop on a year-over-year basis in the coming months.
Plus, in their drive to reduce inflation, the Federal Reserve may be willing to tolerate a higher unemployment rate. That could lead to a rise in foreclosures as workers lose their jobs.
In other words, a perfect storm of high inflation, inflated prices, and a red-hot labor market may combine. That could create a new meltdown in housing.