- Stocks, housing and commercial real estate look expensive to Fed economists.
- Valuations have widened and are under “significant” pressure, central bank staff said.
- They issued a positive outlook for the U.S. economy but warned of risks to the financial system.
While stocks, homes and commercial real estate look expensive, there are significant risks that their values could fall, Federal Reserve economists said.
“Staff characterized asset valuation pressures as significant, with particularly high valuations for stocks, residential, and commercial real estate,” the minutes of a three-week Fed meeting released Tuesday said. “I did,” it says.
Economists at the U.S. central bank noted that both stock valuations and home prices have risen to historic highs.
“The forward price/earnings ratio (P/E) of S&P 500 companies has increased to the top 25% of the historical distribution,” the minutes stated. “Despite tight credit conditions in the mortgage market, home prices have risen to the high end of their historic range relative to fundamentals.”
Fed officials also warned that commercial real estate values appear excessive. “While CRE prices have fallen, valuations remain elevated and market capitalization remains near historic lows,” the minutes read.
In-house economists said the shift to remote work continued to hurt the office sector, and delinquency rates for commercial mortgage-backed securities rose as more people failed to repay their office and retail loans on time. he pointed out.
Some market commentators have warned that asset prices are in a bubble and destined to collapse, especially as the Federal Reserve has raised interest rates from virtually zero to more than 5% since last spring in an effort to fight inflation.
Higher interest rates encourage saving over spending and raise borrowing costs, which can reduce demand for a company’s products and result in higher interest payments on debt. It also pushes up yields on risk-free assets such as U.S. Treasuries, making stocks, real estate, and other risky assets less attractive.
Additionally, interest rate hikes have pushed mortgage costs to their highest levels in more than 20 years. This created an affordability crisis and froze the housing market. This is because buyers who have set a price are waiting for a better deal, and prospective sellers are clinging to fixed lower interest rates.
The debt-laden commercial real estate sector is facing a difficult time of falling property values, rising interest costs, and a credit crunch as lenders retreat fearing a spike in defaults and a new wave of withdrawals. There is.
In response to these pressure points, Fed officials warned of “significant” vulnerabilities in the U.S. financial system, including funding risks and high leverage in the financial sector. They also warned of “moderate” vulnerabilities related to corporate and household debt.
Still, a recession is not expected given the economy’s strong growth in recent months, low unemployment, slowing inflation and resilient consumer spending.
Stocks, housing, and commercial real estate may be pricing in such positive economic conditions, but when the Fed’s own economists say they’re expensive and under pressure, investors will definitely take note. Dew.