A billionaire who made his fortune shorting subprime mortgages is saying the current housing market is an even bigger bubble than before the Great Recession set in. Jeff Greene told CNBC he sees the housing market in the U.S. as an “Omni-bubble” that will eventually burst. For many, the only real question is whether the coming crash will be a nose dive or a soft gearless landing.
In a recent interview via Power Lunch, Greene the capital flow from burgeoning corporate balance sheets and individual bank accounts have powered up prices in the market. He also says the flow will stop, sooner or later. The strangeness of housing soaring during this pandemic has many experts fearful of what will happen next. One big problem is that there are not a lot of solid facts out there in the info stream. Washington Mutual Savings Bank CEO Kerry Killinger told Seattle’s Morning News with Ross recently:
“We think the feds are once again taking us down a position of severe risks in the economy for a potential another bursting of bubbles like the stock market and housing and the like. And we figured that the only way they’re going to learn so they don’t repeat some of those same mistakes is to get a lot of those true facts out there.”
The situation is almost surreal if you think about it. The low mortgage rates, soaring home prices, and the dizzying new reality the workforce is being swept into make the market unsteady and explosive, for many. And Greene, like many others, is forecasting market-breaking inflation. He also sees much higher interest rates coming soon. Those who disagree with Greene cite the differences between the current market bubble and that of the Great Recession.
Market positives say higher lending standards, pandemic mortgage forbearance, and equity growth will dampen the effects of any bubble burst. But the equity argument assumes that home valuations would outpace owed mortgage balances should the market collapse. Of course, the average homeowners’ situation is far better than it was in 2009, but life costs a lot more today than 12 years ago too. And underneath all the growth and pricing bonanza, a deeper problem looms large.
The current market boom does not have to bust on account of higher interest rates or other market-driven factors. Take a look at Canada, a market that is twice as big, GDP-wise, than that in the U.S. The income inequality made more intense by Canada’s housing bubble is locking out young people and new homeowners. At the end of the day, the hard work ethic young families were taught would bring them to homeownership dreams has evaporated.
The pandemic has made the well-to-do richer, and it has devastated middle and lower-income workers. And if we factor in the effects of speculation, predicting a huge problem in the U.S. becomes a lot easier. Bay Street veteran David Rosenberg, chief economist and strategist at Rosenberg Research, said recently that the metrics show financial conditions in Toronto and Vancouver's markets deteriorating dramatically. The expert said he’s looking at the same home price-to-rent ratios, and home price-to-income ratios, and he sees the same kind of overexposure that occurred in 2008-2009 in the U.S.
We have to look back to the time nine million families lost their homes to foreclosure or short sale. This was between 2006 and 2014 when housing values plunged 30% or more. Homeowners collectively lost over $7 trillion dollars during this period. Today, other parts of the economy are not growing as fast as housing. What does this tell us? Is affordability going to eventually lower demand? Of course, it is. Other countries with red-hot housing markets are already beginning to address the issue. But if you look at the news, most media outlets are parroting fearlessness. This is because investment houses are fueling the bubble to stoke profits. And therein lies the biggest problem for the average home buyer/owner. Speculation is what caused the last bubble to burst.
There’s a current housing shortage brought on by the pandemic. Government regulators have created artificially low-interest rates to spur this bubble. And investment speculators are milking the situation for everything it is worth. Housing price inflation, combined with individuals taking on too much dept, will eventually lead to a breaking point at the personal level, and even in international markets. Karsten Biltoft of the Danish Central Bank warns of a potential collapse in home values. In America, however, the speculators seem to be having the final word. These investors, and naturally the agents selling homes, are going with the narrative that current homebuyers can afford the houses they are buying at escalated prices.
Personally, I don’t buy it. I know too many people who cannot afford the two SUVs parked in their two-car garages, and the bass boat parked crossways in the driveway. We also need to consider key warning signs like the number of unregulated mortgage lenders (six of ten are not banks), the coming foreclosures lists, affordability indexes, and other factors.
The average American is currently caring over $6,000 in credit card debt. The average family owes over $28,000 in auto loans, $57,000 in student loans, $195,000 in mortgages, and savings are being tapped out by almost half of these families. Median household income is also down. 51% of households reported incomes decreasing overall in this survey. And U.S. consumer debt it through the roof, record-breaking, more than at any time in our history. And Generation Z, the up-and-coming homeowners of the future, are gobbling up debt 5 times faster than any other demographic. Taking a brief look at wage statistics, it seems clear that the cost of living and other factors will far exceed wage increases in the foreseeable future.
Finally, during the Trump administration, more jobs were lost in America than under any administration except that of Herbert Hoover in the Great Depression. Just how Wall Street and other market tweakers managed to even create a housing boom during this pandemic seems like Carnival magic to me, anyhow. The point is, there is room for BIG concern over the current market. Will there be a huge housing bubble burst? The bull market always turns into a bear, but the crucial thing is always, how fast?
If some unforeseen economic or health factor comes to bear, we could see a loud bust, a wheezing fizzle, or as some experts predict a cool chilling out for price and demand. What disturbs me most, is the unbridled speculation that has seeped into the market. Even my most conservative friends are taking the advice to borrow on everything, and grow, grow, grow. One big economic hit and all those borrowers will be broke. The bubble billionaire Jeff Greene is talking about is a risk everyone in the market should watch closely.