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Hedge Fund Manager: Inflation Could Pop the Housing Market Bubble in 2020

Last Updated September 23, 2020 1:25 PM
Kiril Nikolaev
Last Updated September 23, 2020 1:25 PM
  • The housing market is printing highs on several indices.
  • Home values have grown at a breakneck speed, pricing out many buyers.
  • Inflation might be the final nail in the coffin that ends the multiyear housing bull market.

Believe it or not, the U.S. housing market is overvalued. This month, the U.S. Housing Market Index soared to 76 , a level not seen in two decades. Some might claim that this is an ultra bullish signal but it’s more likely that the market is close to the top.

U.S. Housing Market printing a 20-year high
U.S. Housing Market printing a 20-year high. | Source: Twitter 

Hedge fund manager Will Meade shares the same sentiment. The former Goldman Sachs analyst says that the real estate market is extremely overpriced. He’s confident that the housing market bubble will burst in 2020.

Overheating House Market Ripe for a Correction

One of the biggest reasons why the housing market remains sluggish is inventory shortages. American homeowners are hesitant to leave their homes because prices have sharply increased to the point where many can’t afford to upgrade . Aggravating the supply woes is inventory constraints. The dearth in labor and land is making it extremely difficult for homebuilders to keep up with growing demand.

Weak inventory is contributing to rising housing prices
Weak inventory is contributing to rising housing prices. | Source: Federal Reserve 

The tight supply is sending housing into the stratosphere. The Case Shiller Home Price Index printed an all-time high of 218.97 in September. This spurred Will Meade to tweet something about the value of the real estate sector. He said,

The housing market is ridiculously overpriced in every major US market.

housing market overpriced
Will Meade thinks that the growth in the housing market is no longer sustainable | Source: Twitter 

Although sellers may be able to command more for their houses, it’s unlikely they’ll find a buyer. Even with easy access to loans, first-time buyers can’t afford to purchase a home due to sky-high prices. In a Forbes interview, John Stech, chief executive of property middleman Sundae, says that high valuations may price out buyers . He said,

While sellers may be able to ask more for their homes, they’re likely to get fewer offers in total due to more buyers being priced out of the market.

It will only get worse for the housing market. Will Meade expects 2020 to put more stress on the real-estate sector.

Inflation Would Be the Last Straw to Break the Camel’s Back

On top of inventory shortages, there’s another catalyst that can push the housing market to greater heights: inflation. According to Meade, a weak U.S. dollar and high Treasury yields would result in inflation.

Will Meade tells his followers what to do when inflation strikes
Will Meade tells his followers what to do when inflation strikes. | Source: Twitter 

When inflation hits, prices of basic materials to build a house such as wood, steel, concrete and glass shoot up. Homebuilders, who are already struggling to keep up with demand, would be forced to spend more on building materials. Consequently, the price of new homes would skyrocket.

In the end, more homebuyers will likely be priced out.

The Downward Spiral That Might End the Housing Bull Market

As prices continue to rise, fewer buyers would be able to afford a home. Sellers would then be forced to list their homes at a significant discount to attract interest. At first, only a handful would adopt this strategy. Others would stay on the sidelines hoping that the market bounces. When it fails to recover, panic selling will likely ensue.

Once the dominoes begin to fall, it would be difficult to find a bottom just like in 2007. Meade seems to remember what happened clearly.

housing market illiquid
When the housing market collapses, finding buyers would be a nearly impossible task. | Source: Twitter 

This could spell the end of the multiyear housing bull market. Inventory shortages coupled with inflation would send prices beyond the reach of buyers. If that happens, the housing market is toast.