How Student Loans Could Accelerate The Housing Market Decline
The Butterfly Effect
Anybody who follows the Lead Lag Report knows that two themes I believe in very much are 1) the housing market is a leading indicator of economic activity as a whole and 2) it’s all about path, in terms of both order of events and the sequence of returns.
Hyperinflation, an aggressive Fed rate hiking cycle and one of the worst bear markets in bonds ever have turned the expected sequence of returns upside down over the past two years. The order of events, however, still matters very much. A resilient U.S. economy that’s remained healthier than expected for longer than expected has propped up asset prices now, but the traditional markers that tend to turn ahead of major market downturns, especially lumber and housing, are already flashing. The short-term tends to be volatile. Over the long-term, the path of events and returns tends to play out as expected more often than not.
As it stands right now, housing and commercial real estate are already starting to crack, but the damage appears to be far from over. There’s one potential catalyst that could accelerate this slide and it’s probably one that a lot of investors wouldn’t even think of - student loans.
I floated this idea on Twitter as one of those “butterfly effect” moments where a few flaps of the wing could eventually turn into a hurricane. Student loans may not end up being the ultimate reason why the housing market falls into further decline, but I did want to do a bit more of a deep dive on the idea here for subscribers.
As for how the path from student loans to a housing market decline could look, consider the following sequence of events…
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