A recession is coming and maybe as early as summer

[Michael P. Lindekugel]

Previously, the Federal Reserve indicated it would raise the federal funds rate four times this year. On March 16th the Federal Open Market Committee said it expects to raise the federal funds rate six times this year targeting increases between .25 and .5. The Fed announced it will raise interest rates .25 the first round. Federal Reserve Chairman Jerome Powell is study of past Federal Reserve Chairman Paul Volker. Inducing a recession is the only way to slow hyperinflation. Volker induced two recessions in 1981 and 1982 to stop 1970s hyperinflation. I think the Fed could induce a recession by summer.

Housing on a national level is overvalued relative to inflation by about 35%, relative to wages about 27%, relative to rents about 25%. The home price to income ratio is very close to 2007 just before the Great Recession. But, there are few high leverage purchases compared to the 2000s. All cash homeowner purchases account for 25% of sales. Most purchases include a significant down payment compared to many low down payment purchase in the 2000s. We are due for a price correction. Price corrections are 10% to 12%.

The 10 year treasury and 30-year fixed mortgage loan market reacted to the March 16th FOMC spiking. By raising or lowering short-term interest rates, monetary policy affects the housing market, and in turn the overall economy, directly or indirectly through the effects of interest rates on 1) the user cost of capital, 2) expectations of future house-price movements, 3) housing supply, 4) standard wealth effects from house prices, 5) balance sheet, credit-channel effects on consumer spending, and 6) balance sheet, credit-channel effects on housing demand.

If a bear market emerges, then we should expect home devaluation nationally of 20% to 30% or more in markets overvalued relative to wages and rents.