Michael Burry predicted 2008 mortgage market crash; Will it happen again?

Well-known hedge fund founder and visionary investor Michael Burry back in 2005 spotted irregularities in the subprime market, foreseeing the 2008 financial crisis, which led to recession. 

After his thorough analysis of mortgage practices and market risks revealed the impending collapse. Burry’s insight was in recognizing the danger of low-income borrowers taking on high-leverage mortgages. To profit from this, he used credit default swaps from banks like Goldman Sachs to bet against the housing market. 

Initially met with skepticism, his commitment paid off, earning him and his investors substantial profits when the market shifted as he predicted.

As the 2008 market turmoil unfolded, major financial institutions crumbled. Burry’s bet paid off handsomely, resulting in substantial profits and being famously chronicled in a book and a movie titled “The Big Short.“

How did the financial crisis look in numbers?

The financial crisis hit hard in terms of numbers. GDP shrank by 4.3% from 2007 to 2009, leading to an 8.8 million job loss and a 10% unemployment rate by October 2009. Home foreclosures affected 8 million households, erasing $19.2 trillion in household wealth and causing an average 40% home price decline.

The stock market took a hit, with a 38.5% drop in the S&P 500 in 2008, resulting in a $7.4 trillion loss in stock wealth, or about $66,200 per household. Employer-sponsored retirement accounts saw a 25% decline (around $0.8 trillion) in 2008, and adjustable-rate mortgages (ARMs) had failure rates approaching 30% by 2010.

Current situation of the mortgage market

A thread on X from the co-founder of Residental Club and a U.S. housing market analyst, Lance Lambert, warns of the possibility of repeating the events that led to the 2008 housing market crisis.

He says:

“The mortgage market is experiencing a severe recession. It’s one of the worst downturns in mortgage market history. Traditional refi is RIP right now. And this week, mortgage purchase apps hit the lowest level of the post-1995 era.” highlighting the worrying signs that are indicators of a possible housing market crash.

The mortgage and financial industry has witnessed a series of significant developments in recent months. Notably, there have been numerous acquisitions and layoffs, with companies like Trustar Mortgage being acquired by Archer Mortgage and People’s Bank of Commerce exiting residential mortgage lending. 

Layoffs have also affected companies like Homestar Financial and Hometown Lenders, while others, such as Wesley Mortgage, expanded by absorbing competitors.

In response to changing market conditions, several firms have made strategic decisions. Equity Prime Mortgage closed its retail division, and Point reduced its workforce in Palo Alto, CA. Re/Max downsized its workforce, and Regions Bank closed some standalone mortgage branches, while Blend reduced its workforce considerably. 

If Lambert proves correct, we may be witnessing the unfolding of another housing crisis that may have severe consequences and lead to a recession even worse than the one that followed the 2008 market crash.