Housing market crash: U.S. facing “rapidly evolving catastrophe” – how it will end
The ‘reverse wealth effect’ caused by the escalating housing market crash in the United States will have a profound impact on the nation’s economy.
That’s according to best-selling finance Author and former Wall Street analyst, John Rubino.
“People depend on their image on the value of their house and if the house drops from $2 million to $1.2 million, then all of a sudden they’re not going to take that exotic vacation next year, they’re not going to upgrade to the next Tesla model, and spending plunges,” he told WT Finance.
“We’re looking at that in a big way going forward, not just in housing but also in a lot of other things going on in the economy.”
Rubino’s comments came after Redfin research revealed US$2.3 trillion, or 4.9%, had been wiped from the total value of U.S. housing in the second half on 2022.
The decline in the U.S. housing market over the period is the sharpest recorded since the 2008 financial crisis.
Breaking point in the U.S. housing market crash
The house market plunged during the same period the Federal Reserve approved four 0.75% increases to the benchmark interest rate in 2022, before a 0.5% increase in December.
The rate increases have continued into 2023, taking the Fed funds rate target range to 4.5%-4.75% and sending borrowing cost to the highest level since 2007.
John Rubino points out the rate increases have simply taken the U.S. back to “normal levels” of interest rates historically, yet he says they are “breaking the system”.
“If you look at housing in the U.S., it’s a rapidly evolving catastrophe, home sales have plunged because prior to the increase in interest rates, home prices had just gone to crazy levels – much, much higher than had been the case in the previous housing bubble in the 2000’s.
“So, houses were already unaffordable, then the Fed comes in and raises interest rates which doubled mortgage rates from like 2.75% at the low on a 30-year fixed rate mortgage to almost 7% right now, which makes the monthly payment on houses almost twice what they were two years ago when they were already unaffordable for most people.
“U.S. housing is tanking basically, sales are way down and prices haven’t started to follow yet, but they will – sales tend to lead prices, so we’re going to see a huge drop in the value of our housing stock which is financially a big deal, but also psychologically a big deal.
Recision in 2023 inevitable, but what is the way out?
Rubino predicts the housing market crash, along with other historic economic pressure will lead the U.S. into a recession this year, but he says the big unknown is whether it will be a deep recession, which causes the Fed to pivot, or a mild recession which emboldens it to keep lifting rates to fight inflation.
“It’s a mess no matter what, but we just have to figure out what kind of mess it is in order to invest correctly for it.
“The 1930’s version of this would be a debt crisis where we get rid of our debt, but via bankruptcy or default – in other words, people can’t pay and all that debt just goes away. But in the process tens of millions of people get thrown out of work, huge numbers of big companies go bust and the system drops into something that may not be fixable.
“The Great Depression was a 10-year-long problem and we only came out of it when World War II happened and we had to ramp up Government spending dramatically.
“The difference being, now Governments are already wildly over-spending. So, for them to go into a World War 3 scenario to pull us out of a depression would just take us right back into hyperinflation.”
“We’re going to live through a decade that will occupy big chapters of future history books and a lot of the analysis will be my God, what were those people thinking?“
Monetary reset?
Rubino does see one way out of this economic death spiral – a monetary reset. It’s something he says the world could see in “the not too distant future”.
This is not unprecedented. In 1971, President Nixon reset the post-war Bretton Woods monetary order by de-linking the dollar from gold.
“It’s not uncharted territory, but the pain that will be felt has to be allocated somewhere and there are political consequences. So we will get political chaos before we have the monetary reset.
What would a monetary reset in the U.S. look like? There are two possibilities, says Rubino.
The first – a socialist takeover.
“We could end up with a socialist dictatorship very easily if the half of the population that seems to love that sort of stuff wins the debate.”
The second – gold and silver-backed currency.
“We were founded on a platform of limited Government and individual freedom and sound money, and in the Constitution there’s a clause that says ‘money is gold and silver’. So, we could go back to something like that.
“We’d go back to a serious gold standard that limits the ability of Government to take on new debt and (leads to) a constitutionally limited Government, where individual freedom is paramount.
“Those are the two ends of the spectrum.”
Related: Are we headed for a depression in 2023?