According to Yahoo News, Federal Reserve economists have issued a warning regarding the high valuations of stocks, houses, and commercial real estate, stating that there is a significant risk of their values falling. The central bank's staff characterized asset valuation pressures as notable and highlighted that valuations in equities, housing, and commercial real estate were high. The forward price-to-earnings ratio for S&P 500 companies rose to the top 25% of its historical distribution, while house prices increased to the upper end of their historical range relative to fundamentals, despite tight credit conditions in the mortgage market.
Commercial property values were also deemed excessive, with capitalization rates remaining near historical lows. The office sector continued to suffer from the shift to remote working, and delinquency rates on commercial mortgage-backed securities rose as more people failed to repay their office and retail loans on time. The Fed's inflation fight has seen interest rates rise from virtually zero to more than 5% since last spring, causing an affordability crisis and freezing the housing market.
The Fed's economists flagged notable vulnerabilities in the US financial system, including funding risks and the amount of leverage in the financial sector. They also cautioned of moderate vulnerabilities tied to business and household debt. However, they do not anticipate a recession given the economy's strong growth, low unemployment, slowing inflation, and resilient consumer spending in recent months. Investors are likely to pay close attention to these warnings from the Fed's own economists regarding the high valuations and pressures on stocks, houses, and commercial real estate.
