[Global Focus] A Stronger Threat Than Stock and Bitcoin Crashes Approaches... The 'Judgment Day' for US Housing Prices

GMO Chief Investment Strategist Gransham Warns "Current Asset Market is the 5th Bubble"
US Home Price Growth Rate Higher Than Before Financial Crisis... Concerns Over 'Destructive Impact on Economy'

[Asia Economy Reporter Byunghee Park] According to cryptocurrency information site Coindesk, on the 12th, the price of Bitcoin fell to $25,402.04. This was 63.0% lower than the all-time high of $68,990.90 recorded in November last year.

On the same day, the New York Stock Exchange S&P 500 index dropped to 3,858.87 during trading. This was 19.9% lower than the intraday high of 4,818.62 on January 4, the highest since the COVID-19 pandemic. The slump in technology stocks, which led the rise in the New York stock market after the pandemic, is even more severe. On that day, the Nasdaq index fell to a level 31.5% below its previous high on November 22.

As the cryptocurrency and stock markets, which have been criticized for bubbles since the pandemic, have plunged one after another, concerns are growing that the next bomb might explode in the housing market. Robert Shiller, a Yale University professor who developed the Case-Shiller Home Price Index, a representative U.S. housing price indicator, pointed out a year ago that serious bubbles had already formed in the cryptocurrency, stock, and housing markets.

The U.S. biweekly economic magazine Fortune reported on the 7th that Jeremy Grantham, co-founder and chief investment strategist of major U.S. asset management firm GMO, recently expressed concerns about the sharp rise in mortgage rates and warned that the "day of reckoning" for the housing market is approaching.

◆ U.S. Housing Bubble More Severe Than Before the Financial Crisis = Grantham, the investment strategist, pointed out that the current asset market is in the fifth modern bubble. The previous four bubbles he identified were the 1929 Great Depression, the 1989 Japanese real estate bubble, the 2000 dot-com bubble, and the 2008 U.S. housing market-triggered global financial crisis.

Grantham has been warning about a super bubble since last year. He argued that if excessive risk-taking investments shrink, the S&P 500 index could be cut in half. Although Grantham was criticized for being overly pessimistic, his claims are gaining renewed attention as the New York stock market has fallen by 20-30%.

The market Grantham genuinely worries about is not stocks but the housing market. This is because a decline in housing prices could more significantly reduce U.S. household consumption. Stocks and mutual funds account for about 10% of U.S. household assets, but housing accounts for nearly 30%, three times higher. Therefore, Grantham points out that while the U.S. economy can withstand a stock market decline, it cannot endure a housing market downturn.

U.S. housing indicators already show a serious overheating situation. The Case-Shiller Home Price Index, which aggregates housing prices in 20 major U.S. cities, rose to 298.9 in February this year, surpassing the pre-global financial crisis peak of 206.7 in April 2006.

Despite the sharp rise in housing prices, the upward trend shows no signs of stopping. The February increase rate of the 20-city home price index was 20.2%. The highest pre-financial crisis increase rate was 17.1%, recorded in June and July 2004.

Professor Shiller appeared on CNBC in May last year when the 20-city home price increase rate matched the pre-global financial crisis peak and warned of bubble risks in the housing, stock, and cryptocurrency markets. At that time, Professor Shiller compared the market's irrational speculative frenzy to the "Wild West," referring to the era of western expansion.

Even after the home price increase rate peaked in 2004, the global financial crisis broke out four years later. The Case-Shiller Home Price Index increase rate sharply slowed in 2005 and turned downward from 2007. Considering that, since the current home price increase rate has not yet confirmed its peak, there is still room for the housing market bubble to inflate further.

◆ Sharp Increase in Household Debt Ahead of Fed Rate Hikes... Why? = U.S. households have significantly increased their debt this year. According to the quarterly household debt report released by the New York Federal Reserve on the 10th, household debt increased by $266 billion in the first quarter of this year, the largest increase since before the 2006 financial crisis.

Of this, mortgage debt increased by $250 billion. As home sales continue at high prices, homebuyers are borrowing to purchase homes.

In particular, as the central bank, the Federal Reserve (Fed), has begun to raise benchmark interest rates in earnest, there is an analysis that demand to buy homes increased before interest cost burdens rise further, causing household debt to surge in the first quarter. Cumulative household debt reached $15.84 trillion, which is $1.7 trillion more than before the COVID-19 pandemic. Housing-related debt accounts for $11.5 trillion, or 72.6% of total debt.

As the Fed's benchmark interest rate hikes take full effect, this sharp increase in household debt is likely to become a boomerang in the future. U.S. mortgage rates have recently risen sharply.

Investment strategist Grantham also recently warned that the rise in mortgage rates is a danger signal. The current 30-year fixed mortgage rate has soared to 5.3%, the highest since 2009. Grantham warned that as mortgage rates soar, the U.S. is heading toward a housing crisis, and the impact of a housing crisis on the economy could be devastating. He pointed out that both stock and housing prices have risen to unsustainable levels due to the Fed's unsustainable monetary policy and investors' speculation.

The current mortgage interest delinquency rate over 90 days is only 0.5%, very low. However, even in the second quarter of 2006, when the home price increase rate fell to single digits before the 2008 global financial crisis, the mortgage delinquency rate was only 0.9%. Thus, the current low delinquency rate is not a situation to be complacent about.

Voices warning of a housing market bubble are growing even within the Fed. The Dallas Federal Reserve Bank warned in a March report about the housing market bubble, stating that "housing prices appear to be detached from the economy's fundamental conditions."