“Big Short” investor Dave Burt said recently to CNBC that the US Housing market may see a 2008-style correction as 20% of the market could be mispriced due to flood risks, which could result in another disaster.
In case you don’t know who Dave Burt is, he is the CEO of the investment research firm DeltaTerra Capital and was one of the few people who predicted the impending housing crash back in 2007.
He helped two of the protagonists of Michael Lewis’ bestselling book “The Big Short” bet against the mortgage market in the lead-up to the 2008 global financial crisis.
As it turned out, they were right and were estimated to have made millions.
Now Burt believes that history could repeat itself and it’s only a matter of time before the housing market crashes.
Today, we’ll take a look at the CNBC article titled “A hidden time bomb? A ‘Big Short’ investor sees financial disaster brewing in housing markets” to see what he is saying.
Lets dive right in
Dave Burt’s firm, DeltaTerra Capital, provides institutional investors and other real estate capital markets participants with the tools they need to measure and manage financial risks related to climate change.
And now in April of 2023, he believes an overlooked climate risk may bring the housing market crashing down.
Burt said DeltaTerra Capital’s research suggests that 20% of U.S. homes have “meaningful exposure” to a mispricing issue because of flood risk.
“We think of this repricing issue as maybe a quarter of the size and magnitude of the [global financial crisis] in aggregate, but of course very, very damaging within those exposed communities,” Burt said.
Known for being one of the few to predict the 2008 financial crash which was documented in “The Big Short” — Burt noted the recovery in Florida from Hurricane Ian was an issue he’s watching closely, particularly because this storm surge exposed a flood insurance nightmare for homeowners.
The event caused $65 billion in insured damage and led to a drastic increase in insurance pricing.
“Will they become chasms (kas’m) this year? I’m not sure,” Burt said. “But an observation of the highest frequency fundamental data on home sales and home inventories indicates that things are definitely going south for these exposed properties.”
While most investors remain skeptical of the impact of climate risks on their portfolios, a February report from the journal Nature Climate Change found that the U.S. Housing market may be already overvalued by $200 billion on account of flood risks — a factor that is oftentimes not priced in.
“In general, highly overvalued properties are concentrated in counties along the coast with no flood risk disclosure laws and where there is less concern about climate change,” the study found, adding that low-income households were at the greatest risk.
“The biggest reason why it matters from our perspective is that climate risk isn’t being priced into the housing market,” Jeremy Porter, head of climate implications at the First Street Foundation, told CNBC.
Porter warned that buyers of these homes may not be sufficiently informed about the flood risk, therefore putting them in danger of suddenly seeing their property fall in value dramatically overnight.
Currently nearly 15 million U.S. properties face a 1% probability of flooding, with expected annual damages to residential properties exceeding $32 billion.
The number of U.S. properties exposed to flooding could increase by 11% and the average annual losses could jump by at least 26% by 2050.
“When you buy a home, one of the most important considerations is the cost of maintaining that home and I think so many important decisions are made based on that,” Burt said.
He goes on to say that until people really know what these climate related costs will be, new problems will arise every day.
The Federal Emergency Management Agency (FEMA) maintains that floods can occur anywhere—not solely in coastal areas.
And if someone miscalculates their property’s flood risk, they could take a significant financial hit if a flood did occur.
According to the CNBC article, home costs in today’s market don’t account for the home’s flood risk.
Instead, the homes, which are already overvalued by the pandemic housing boom, present a mispricing issue for areas at risk for floods.
“It is not that farfetched to say that you hit a tipping point,” Porter said. “It may be community by community. It may be a larger tipping point that you hit across the country in the real estate market. But eventually, you are going to hit either a local or national tipping point where there is going to be some type of bubble that bursts.”
If his warnings come to fruition, our housing market is in serious trouble.
But not everyone agrees with Porter.
In an article in go banking rates.com, Jay Hatfield, CEO at Infrastructure Capital Advisors, said that there is no chance of a housing market crash from climate risk, as there is currently a shortage of total homes for sale, with inventories of less than 1.8 million, compared to the 4.5 million homes for sale during the financial crisis.
“Consequently, we expect the housing market to remain resilient as mortgage rates have peaked and are likely to trend down as the 10-year treasury rallies,” said Hatfield.
“We would characterize the climate risk to housing as an insurance issue, with most insurers unwilling to provide flood insurance. State and Federal insurance is available although many homeowners do not elect to obtain it. If there are uninsured losses that cause mortgage defaults, we do not believe that would be material to the housing sector as a whole.”
So, what do you guys think?
Do you agree with Burt that climate risk and mispricing issues threaten the stability of the U.S. Housing market by not including the increasing costs of flooding in property values? And that this may lead to a housing crash?
Or do you believe our limited available inventory will avoid a housing market crash and instead will help it to rebound quicker from the correction?
Comment below and let us know what you think. And tell us where you are and what you are seeing in your neck of the woods.
And If you didn’t see last weeks video on the the discrepancy between the west coast and northeast & midwest, take a look at it now. I think it shows how different the housing market is throughout our country.
Thanks for watching. I do appreciate it. Bye