The Fed’s own economists are warning of a 19.5% housing correction and more rate hikes could set off a ‘domino effect’

Happy hump day, team. I’m senior reporter Phil Rosen, writing to you just blocks away from where Goldman Sachs held their second-ever investor day on Tuesday.

If you’re not familiar with investor days, it’s basically when a company gives an update on where they stand and where they’re going.

Goldman’s first one was in 2020 — but a lot has changed since then.

For more on that, I recommended reading my colleague Dan DeFrancesco’s excellent 10 Things on Wall Street newsletter.

While my newsletter keeps you up to date on what’s moving markets, Dan keeps tabs on what’s happening inside the most powerful financial firms in the world.

I read it everyday — you can sign up here.

And for today, let’s see why the Fed’s own economists are warning of a nearly 20% housing correction.

If this was forwarded to you, sign up here. Download Insider’s app here.

homes

David McNew/Getty

1. Tuesday’s Case-Shiller data told us that home prices slipped 0.3% in December compared to November, marking the sixth straight month of declines.

While they are still higher than they were one year ago, prices are now 4.4% lower than when they peaked last June. That, and the pace of annual increases slowed to 5.8% from 7.6% in the prior month.

The three cities that saw the steepest price declines on a seasonally-adjusted, month-over-month basis included Las Vegas, Phoenix, and Portland.

“The prospect of stable, or higher, interest rates means that mortgage financing remains a headwind for home prices, while economic weakness, including the possibility of a recession, may also constrain potential buyers,” said Craig J. Lazzara, managing director at S&P DJI.

More troubling than the data release, though, is a new report from Dallas Federal Reserve economists. They argued US home prices would have to tumble nearly 20% to bring the housing market back to fundamentals — and additional Fed rate hikes could lead to an even worse housing correction.

The authors pointed to the steep growth of price-to-rent ratios, among other factors, as reason to believe “the bubble hypothesis merits attention.”

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Remember, over the last year, the Fed’s aggressive rate-hiking cycle pushed mortgage rates to 7% in October.

They pulled back near 6% in early February, but are rebounding again and tighter central bank policy threatens to bring them even higher.

In any case, that could still have worldwide repercussions. Here’s how the Fed researchers put it:

“The possibility of a domino effect, where investors pull out of international housing seeking safety and liquidity elsewhere, also raises concerns of spillovers beyond Germany or the US to the global economy.”

Have you entered or exited the housing market in the last year? What was your experience like? Tweet me (@philrosenn) or email me (prosen@insider.com) to let me know. 

In other news:

Cathie Wood of Ark Invest

Photo by PATRICK T. FALLON/AFP via Getty Images

2. US stock futures rise early Wednesday, after Wall Street closed out a losing February for stocks. Meanwhile, hopes for the global economic recovery rose after China’s manufacturing activity grew at the fastest pace in over a decade. Here are the latest market moves.

3. On the docket: Okta, Budweiser, Celsius, all reporting.

4. These four charts explain the troubling state of the housing market right now. Goldman Sachs strategists broke down which areas of the US are seeing supply outpace demand — and then broke down which four cities could soon see the steepest price declines.

5. Interest rates suggest the stock market is wildly overvalued. That’s according to JPMorgan’s Marko Kolanovic, who pointed out that history implies that the S&P 500 multiple is about 2.5x overvalued. It’s more evidence to the bank on why they are underweight on equities to start 2023. 

6. Binance used customer funds for its own purposes in a move similar to the now-imploded FTX. Forbes reported that the crypto exchange transferred $1.8 billion in stablecoin collateral to hedge funds. A spokesperson told Insider that Binance has “never invested or otherwise deployed user assets without consent under the terms of specific products.”

7. Cathie Wood doesn’t think markets should fear inflation or the bursting of the tech bubble. The Ark Invest chief said in an interview with CNBC that high prices will continue to fall, and she shrugged off the possibility of a dot-com style bust. She broke down her bullish stance that goes against many Wall Street banks. 

8. This top-1% fund manager shared a batch of stocks that offer a “margin of safety” from a possible credit shock. Here are the 13 beaten-down names that he’s most bullish on.

9. Strategists at Goldman Sachs shared 12 stocks that “smart money” hedge funds are snapping up. This year’s micro-driven market is expected to favor esteemed stock pickers, so tracking top firms’ purchases can help you keep up. Get the full list.

Brent crude oil price on March 1, 2023

Markets Insider

10. Crude oil prices just capped off their fourth losing month in a row. The Fed’s interest rate hikes have been weighing on benchmark prices, but many analysts expect prices to tick higher in March as Russia slashes its oil output.

Curated by Phil Rosen in New York. Feedback or tips? Tweet @philrosenn or email prosen@insider.com.

Edited by Jason Ma in Los Angeles and Hallam Bullock (@hallam_bullock) in London.

Read the original article on Business Insider