Leave it to the big bank that didn’t think there was a bubble in 2008, to not think there is a bubble in 2021.
“We have strong conviction that we are not experiencing a bubble in US housing,” Morgan Stanley investment bank wrote, the same bank which lost $37 Billion in the housing bubble of 2008.
Zero Hedge published a note issued by the investment bank Morgan Stanley, written by the company’s Managing Director in Credit Securitized Products Research and Strategy, Vishwanath Tirupattur. In it, the bank claims that, although housing prices are at an all-time high, they are confident that there is no bubble in U.S. housing.
S&P Case-Shiller Index of home prices rose 12.2% yearly, as prices rose in all 20 metropolitan areas measured by the index. The median selling price of homes increased by $35,000 in just a year. Housing prices have not increased that rapidly since 2006.
Morgan Stanley acknowledges that fact, as well as the “unhappy memories” linked to the previous boom. However, they insist that “that this time is indeed different.”
Why is it different? The bank’s argument rests on the notion that the 2008 housing bubble was caused by lax credit standards, as well as “layers upon layers of leverage” in the housing sector.
The bank puts the blame squarely on the so-called ‘affordability products’, mortgages that were geared to people who can’t afford a house.
Payments on these mortgages could vary significantly throughout the life of the loan, meaning that the borrowers relied on continued rising housing prices and lax credit standards. Once this was no longer the case, these “sub-prime” borrowers could not afford to pay their mortgage.
Are things really different?
But today, things are different they say. Credit standards are much tighter. “The Mortgage Bankers Association’s index of credit standards, which peaked at nearly 900 in 2006, has stayed well below 200 for almost a decade and fell further to the low 100s post-COVID-19,” they wrote.
“Unlike 15 years ago, the euphoria in today’s home prices comes down to the logic of demand and supply, and we conclude that the sector is on a sustainably sturdy foundation” the bank’s note read. The investment bank thus concludes that the prices will maintain their high level and continue to rise, “but more gradually.”
Real demand, or just easy money?
What are those actual changes in “demand and supply”? The bank cites the number of existing homes available for sale, at “historical lows” while the supply of new homes remains low, and the supply of overall homes at a record low.
This is not surprising, and it’s not just fuelled by demographic trends. Fed’s easy money policy is creating trillions upon trillions of dollars that are chasing the same amount of goods. More money printing won’t magically create more homes. That’s why prices everywhere are going up.
But increased demand for housing doesn’t by itself mean that there can be no housing bubble.
Easy money-fuelled spikes in prices naturally invite irrational exuberance among investors. Many investors thus start speculating with no regard to fundamentals.
Prices of some assets will inevitably be bid up higher than they should, thus creating a bubble ready to burst.
This happened to the dot com companies in the 1990s, and with housing in 2008. Lax lending standards were not the only cause of price increases.
There’s also the issue of malinvestment that accumulates in the economy, which will also have to be liquidated.
Morgan Stanley “forgets” derivatives
It is interesting how Morgan Stanley is mute on huge speculation in derivative instruments, which lead to the collapse of Frannie Mae and Freddie Mac.
Morgan Stanley itself lost over $37 billion through the subprime mortgage bond and related derivatives market.
So, is housing really in a bubble, or are home prices just a reflection of the dollar losing its purchasing power? That’s difficult to say, but a housing bubble is not nearly as unlikely as Morgan Stanley would have you believe.