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Is the American Dream Too Good to Be True?

Pinchas Cohen | Wednesday 25 August 2021

American home prices have risen at the fastest rate on record. How will this week’s Fed policy announcement impact the housing market?

US home prices have not merely been rising at the fastest rate since the 2008 bubble – leading to the crash and the Great Recession, but at the fastest pace in history. 

real-estate bubble

To be fair, today’s market conditions are distinctly different than that of 13 years ago. Houses then grew past their inherent value, as financial institutions created mortgage-backed securities and collagenized debt obligations. Those complex instruments were overly leveraged and except the engineers who created them, people didn’t understand them.

If that wasn’t enough, the credit agencies and the government turned a blind eye to the risks. In other words, prices were artificially higher.

That isn’t the case today, when there is a sharp shortage of homes, and when building companies are actually careful not to add too much supply, the very opposite of the years leading to the housing bubble in the 2000s. Banks are also very cautious not to repeat the same mistakes. 

However, just because the circumstances are different, that doesn’t mean there can’t be a different reason for the same result. Today’s risk isn’t necessarily so much the inherent worth of homes, but rather could be related to the value of the USD, with which consumers pay for those homes.

Big Investors Bearish on US Bonds

DoubleLine Capital founding CEO billionaire bond investor Jeffrey Gunlach warns “we’re running our economy in a way that is almost like we’re not interested in maintaining global reserve currency status”. Gunlach accuses that the U.S. policy of giving money away to Americans who ultimately hand it over to China when buying merchandise produced in China. That puts the Asian nation on track to become the world’s largest economy, hurting the dollar’s global reserve currency status. With that gone, so might the demand for the dollar. 

Apropos, a bond investing, another big-name investor is shorting Treasuries. Michael Burry whose claim to fame of shorting the US housing market before its bubble burst in 2008 is depicted in the movie “The Big Short” is betting Treasuries will sink, a view Citigroup supports. If this scenario plays out, a potential U.S. bond selloff by foreign investors would include an increased dollar supply, which may lower its value.

On the other hand, if Burry and Citi may be wrong. If Federal Reserve Chair Jerome Powell announces tightening monetary policy - as Goldman Sachs predicts - the USD may surge against the euro. More importantly, it would decrease the currency in circulation, which may raise the price of mortgages. That could lessen demand for homes, and could be how the values of houses stop dropping, which might lead to a housing bubble burst.

To summarise, the two housing market environments are very different. There is no accusation of any foul play by institutions. However, as the Federal Reserve attempts to find the delicate balance of nurturing the economy back to health after the worst global health crisis in a century, investors are cautious ahead of this week’s potential monetary policy change.

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