The valuation of all household assets including stocks and real estate has never increased so far beyond the underlying income of Americans, a new report finds. Overvalued markets place the economy at risk of a recession.
“Never have asset valuations been so far beyond underlying incomes to support those valuations as now.” It will be an interesting week with the next installment of Fed’s Flow of Funds due out Thursday. Real economy as tethered as it’s ever been to stock market @SoberLook pic.twitter.com/cvmOLVALv6
— Danielle DiMartino Booth (@DiMartinoBooth) December 10, 2019
Biggest bubble in modern history fueled by stocks and housing
Chris Hamilton, a financial researcher and the founder of Econimica, noted that the rapid expansion of the housing market and stocks have created the greatest bubble in modern history.
The researcher emphasized that the valuations of virtually all assets, not exclusive to stocks and the housing market, are way overvalued considering the average income of most Americans.
The chart below details why this is the greatest asset bubble in modern history. The chart shows the market value of all household assets (stocks, bonds, real estate, etc.) as a percentage of disposable personal income (simply put, the value of all assets held by US citizens versus their total national income that may be invested or saved after all taxes are paid).
Will the low Fed rate save the economy?
Both skeptics and bulls have attributed the U.S. stock market’s bull run to the accommodative stance of the Federal Reserve.
Hamilton noted that the Fed is merely serving the interest of a small group of individuals and companies at the expense of the rest of the market.
In essence, the researcher said that stocks, bonds, real estate and other assets have become unaffordable for the average American. Yet, low interest rates are continuing to push prices up, creating a bubble.
The current and future situation is one of collapsing credit and collapsing money creation as the growth of deflationary elderly overwhelms inflationary working age growth…and into that entirely predictable situation, steps the Federal government, Federal Reserve, and ludicrous politicians to serve the interests of the few at the expense of the many.
Housing market has been in trouble for a while
Already, forecasts show that the U.S. housing market is anticipated to slow down in 2020.
Realtor.com’s annual report stated that the growth in home values will plateau in 2020, with rising mortgage rates leading to lower sales.
George Ratiu, a senior economist at realtor.com, said that buyer sentiment reached its yearly high in mid-2019. Momentum began to fall in the second half of the year amid economic uncertainty.
“Buyer sentiment peaked in the summer and powered sales growth in the fall. However, it lost momentum later in the year, as conditions of low affordability and economic uncertainty persisted,” the report read.
The expected decline or stagnation of the housing market in 2020 could potentially lead to a scenario where people who bought at the peak in 2019 will actually see their home values decline.
This article was edited by Sam Bourgi.