The US Real Estate Bubble

September 22, 2020

This year has been crazy on many levels, and outside of the massive and somewhat inexplicable gyrations in the stock market, there is another market that is acting truly strange. The real estate market.

Marketwatch, a financial website, posted an opinion piece about the US real estate market, and it is a worthy read for anyone who wants to get a better understanding of how government policy is protecting the market from the very real effects of COVID-19. In that article it states that 17% of insured mortgages in the US are currently delinquent. Delinquency rates for subprime mortgages was close to 25% and there is another whole group of lines that don’t qualify for mortgage insurance and delinquency rates amongst that group is more worrisome because up to 40% of those borrowers hadn’t made a payment in over five years.

Put another way, people have to choose between a place to live and food to eat. Clearly choosing food is the more urgent choice. Government moratoriums on evictions have protected people from destitution.

In Canada, there is similar feeling of unease by the Canadian Mortgage and Housing Corporation who published a report yesterday (Globe and Mail article here) saying that they expect house prices to fall between 9 and 18%. Of course many have scoffed at this prediction because prices are currently rising, but CMHC makes the point that without government intervention, disposable income across the country would have fallen by almost 9%. That would clearly be enough to push many homeowners and landlords over the edge, forcing a sale.

There is a lot of data to suggest that things are not so bad. Markets are up, business activity is down but not collapsing and people continue to function almost normally in most of the major economies. This belies the pain, the marginal issues that are being covered up by policy responses. It can’t be said too many times that the US government has injected at least $4 trillion of liquidity to support the market. The entire correction from 2008 through 2013, five years, used about $3 trillion of extraordinary financial assistance.

The Canadian government is expected to show a deficit of over 343 $billion this fiscal year, about 10 times its normal deficit. Ten years of excessive spending in just one year.

With all of that assistance gone . . . a second wave for COVID-19 hasn’t really hit yet.

The reason that the consumer isn’t yet taking a hit is because government is covering up the failures of corporations and individuals in the short term, hoping there are limited long term repercussions. That is unlikely, and soon all of the ‘covered’ items will be uncovered, but the cupboard will be bare.

It is not clear that this will all go horribly wrong, but there is essentially no upside left in any major asset class, so instead of waiting for the music to stop, consider that your best course of action could be to protect your family and your assets the best way you know how.

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