Economists Warn: Stock Market and Housing Affordability Crisis Could Trigger a Larger Recession than 2008
Updated
The stock market had a meaningful drop this week as economists warned of a recession. In addition to the stock market declines, there is a housing bubble as real estate prices are at record highs. There has not been enough to supply to account for the demand, which has effectively priced the middle class out of the market. This has also caused rent prices to increase.
At the same time, there is a credit card bubble as debt has soared to record highs of over $1 trillion. The banks have increased the interest rate by 30% over the last year and a half. Credit card APR has raised from 12.9% in 2013 to 22.8% in 2023. Credit card debt was at 0.77 trillion in the first quarter of 2021. The current balance of 1.14 trillion is a 67.5% increase over 3.5 years. During this same period, the inflation rate, vital bills, and groceries skyrocketed. This has caused more Americans to rely on credit cards for essential goods and services. A January report from Reuters said there was an 18% surge in bankruptcies in 2023.
The question being asked is whether the current economic conditions will lead to a housing market crash, a stock market crash, and/or bank failures. The hope is that a cut to mortgage interest rates can lead to more house listings which will bring the housing affordability crisis back into manageable territory. The indicators that have led to previous recessions have all been present in the current economy, so some economists are saying a recession is inevitable.
In August, former Blackrock investor Edward Dowd joined Host Del Bigtree on The HighWire to discuss the potential economic turmoil. Dowd explained that the stock market crash in early August resulted from the Bank of Japan reacting to an interest rate hike from 0% to 5.5%. “It was one of the greatest bank crashes we’ve seen in Japan in 30 years,” Dowd said.
Many economists have been discussing a recession since last year, including Dowd, but the market didn’t sink as expected. “We started showing recessionary levels last year,” Dowd said. “The only reason we were wrong is because the U.S. government juiced the economy with government spending and government jobs. This is just the beginning of what we think will be a recessionary economy coming in the next 6 to 12 months.”
Dowd said he doesn’t provide financial advice but suggested converting some portfolio or retirement savings into cash is a smart idea. He also said Warren Buffett is converting his investments into T-bills as he expects a large market correction to take place.
“It’s not the end of the world, but it will be painful, and it could be systemic,” Dowd said. “The big fear is this goes systemic, meaning we have bank failures and stuff like that.” Dowd said he doesn’t know if it is going to get that bad, and he wouldn’t predict widespread bank failures until we start seeing some banks going under.
Economic activity is contingent on the amount of money people have to spend, which stands to be strongly affected by artificial intelligence replacing many jobs across the country. Dell reportedly cut 10% of its workforce a month ago to replace sales agents with AI systems. Tech company Cisco also laid off 5,500 workers in the last month to focus on AI systems.
Despite the layoffs announced shortly after his interview, Dowd said the current fear around AI is misplaced. “AI is coming, but it’s not coming for a while,” Dowd said. “The current version of AI is not robust. It’s a language processor. It’s not thinking on its own. There’s been a lot of hype in the financial markets on AI. This reminds me of the dot com boom where it wasn’t ready for prime time.”
Meanwhile, stockbroker and financial commentator Peter Schiff said that the collapse of the United States dollar is imminent. In a Forbes article last week, he quoted, “The Fed suddenly braces for a U.S. dollar crisis that’s predicted to start a total collapse.” In addition, Schiff posted about the gold to oil ratio as an indicator of a sharp economic downturn. The 25-year average ratio is 15.8 barrels of oil for an ounce of gold. The current ratio is over 30, which signifies the dollar is weakening in value. The ratio shot up to 90 in April 2020, just after the start of the COVID-19 pandemic.
Economist Harry Dent has said this is the “bubble of all bubbles” and expects the stock market to crash, with the S&P dropping 86% and Nasdaq by 92%. Ric Edelman, an investor and author, wrote an op-ed in July stating, “The best thing you can do is the exact opposite of whatever he says.” Edelman laid out the stock market predictions made by Dent in his books that date back to 1994 and said, “Well, at least Harry is consistent: for 30 years he’s been consistently wrong.”
Multiple economic indicators of recession continue to show in the data, and financial commentators warn of a collapse that is expected to be worse than the 2008 crash. The affordability crisis has priced the middle class out of the market. The recommendation is that families should spend no more than 30% on housing. The median home sales price in the second quarter of 2024 was $412,300 and the median income was $4,935 per month. 30% of that wage would allow a borrower to get a loan amount of $240,000 at a rate of 6.25%.
While economists warn a recession seems likely, the primary debate is whether it will be an ordinary economic downturn or an unprecedented catastrophic disaster.