The housing market bubble could still burst in 2023

Jeremy Grantham is one of the most respected investors in the world. He founded GMA, a behemoth with a 40-year track record in the industry and over $71 billion assets under management. When he speaks investors listen. For example, he recently warned that the S&P 500 index could tumble to about $3,200, ~21% below the current level. He also warned that the housing market bubble could burst soon.

House prices are crashing

The housing market is going through its most difficult periods in more than a decade as interest rates in most countries rise. Prices have crashed in countries like Sweden, UK, United States, and Australia have all plunged after soaring to their highest points in decades during the pandemic. 

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Sweden, in particular, has been a bit dire, with prices are having a moment of reckoning having crashed at the fastest pace since the 1990s. And analysts believe that Swedish house prices could plunge by about 20% from their highest point in 2022. 

In the UK, data published by Halifax showed that house prices continued dropping in January, continuing trends that were started six months before. The same trend is happening in the US, where the S&P/Case-Shiller house price index has continued drifting lower as shown below.

Interest rates continued rising this year, as we wrote in this article. And, with inflation still stubbornly high and labor market tightening, there is a likelihood that the Fed will continue hiking rates. In a statement last week, James Bullard hinted that rates could rise to about 7%. Some economists even see rates rising to between 8% and 9%.

Jeremy Grantham on the housing market crash

It is against this backdrop that Jeremy Grantham warned about the stock and housing market. He warned that the global housing market bubble was already underway as high mortgage rates make it unaffordable. Further, he warned that housing bubbles take about two to three years to completely form. His statement said:

“The bursting of the global housing bubble, which is only just beginning, is likely to have a more painful economic knock-on effect than the decline in equities is having, for extreme bubble pricing in stocks has been confined to the U.S. only.”

In the same statement, Jeremy Grantham warned that the S&P 500 could crash to about $3,200. This is notable since Grantham has taken a bearish tone in the past few years. And his forecasts have mostly been right.

Will the bubble burst?

That said, as I wrote in my next housing market crash prediction, the idea that we will have a 2008-like crisis soon seems far-fetched since conditions are much different. For one, as shown below, demand for subprime mortgages has declined sharply in the past few years. According to Fred, this demand stands at about -85.6%.

At the same time, demand for housing remains strong, with the main challenge being higher mortgage rates. In my view, prices will continue falling because of the affordability issue and then resume the uptrend as mortgage rates fall and inventories rise. In fact, mortgage rates have been heading downwards in the past few weeks.

This view is in line with what analysts at Morgan Stanley are warning. In a note, they warned that house prices will drop by about 10% between June next year and 2024. So, will the housing market bubble burst in 2023? While prices will decline, I cannot describe that as one similar to what happened in 2008/9. Indeed, as shown below, most real estate ETFs have crawled back quite well, with the Invesco Active US Real Estate Fund (PSR) and Schwab Real Estate ETF (SCHH) rising by 22% from their lowest point in 2022.