In every financial crisis, there is one sector that leads the way down. Usually a year before a financial crisis comes to a head, a particular sector of the capital markets falls into a distressed state.

Analysts first ignore the distress as an outlier because other sectors are performing well. Once the distress becomes too big to ignore, analysts try to reassure investors by claiming the distress will not spread. But it always does. Contagion takes on a life of its own as the financial distress spreads from sector to sector until the entire financial landscape is in flames.

In 1989, the culprit was junk bonds. In 1998, the culprit was emerging markets in Asia and Russia. In 2000, it was the dot-com stocks. In 2007, it was subprime mortgages. Now a new alarm bell has started to ring.

High-end residential real estate in New York City is showing signs of stress. This article reports that sales of condos and co-ops fell nearly 25% in the first quarter of 2018 compared with the first quarter of 2017. This comes on top of another year-over-year quarterly decline in the fourth quarter of 2017.

This is the worst performance in New York luxury residential real estate since 2009 in the wake of the Lehman Bros. collapse. Similar stories are being reported in other overheated luxury real estate markets such as Vancouver, Toronto and London.

Part of this is due to the drying up of Chinese flight capital due to capital controls and Russia flight capital due to economic sanctions. Whatever the cause, this market distress could be a snowflake that presages an avalanche in 2019. Investors should take precautions now by reducing stock exposure and increasing allocations to gold and cash.