Page 26 - BusinessWest July 11, 2022

A Different Playing Field
There Are Some Similarities, but This is Not 2008
By Jeff Liguori
When markets slide, investors’ knee jerk reaction is to draw parallels to difficult markets in the past.
The most recognizable episode in recent his- tory is the Great Financial Crisis (GFC) of 2008- 09. The S&P 500 peaked in October 2007, fol- lowed by a crushing sell off that bottomed out in March ’09 — but not before losing 56% of its total value, a near total collapse of the financial sys- tem, and several high-profile bankruptcies.
A significant contributor to that grueling bear market was the decline in home prices. Real estate was a bubble that overinflated; the ‘pop’ led to a meltdown in our financial system due to intricate investment products linked to mortgag- es, over-leveraged home buyers, and inordinate risk assumed by some large investment banks. When that very large balloon deflated, there was no place to hide until the buyer of last resort
— our federal government — stepped in with a bailout.
There are some eerie similarities in today’s investment landscape. Home prices have trend- ed drastically higher as pent-up demand, fueled by excessive liquidity and a strong economy, has caused a buying frenzy in many markets. Speculation, specifically in crypto currency and “meme” stocks, prompted unsophisticated and inexperienced investors to buy assets about
which little was known. The quick success of those speculators was widely publicized through social media, which caused a feedback loop that then further inflated the bubble as it drew more neophytes into the ‘game.’ We’ve
seen this movie before, and it
doesn’t end well.
Following the playbook of the GFC, should we expect a high-pro- file bankruptcy of a major financial institution, or a collapse in the housing market, or — heaven for- bid — both and maybe more? We keep hearing that we’re in a bear market and a recession is all but guaranteed, so what now?
First, from a macro economic
standpoint, today’s economy is
quite different than what we experienced 13 years ago. Take real estate. Yes, home prices have skyrocketed and the market for buyers is pos- sibly as tight as it has ever been. But the number of homes being bought with cash is at the high- est level since 2005; transactions not subject to financing by the buyer represent almost one quarter of all transactions. For perspective, cash transactions at the peak of the market in 2007 were almost 40% lower than they are today. Mortgage debt is almost always the greatest
liability for a consumer; that liability was signifi- cantly higher during the 2008-09 recession. And bank-lending standards today have made it more difficult for less creditworthy consumers to take
“
ket. When it cools – and it will – there should be enough demand to maintain stability.”
on mortgages because of the Great Financial Cri- sis. This is not that housing market. When it cools – and it will – there should be enough demand to maintain stability.
This is not that housing mar-
The number of first-time home buyers, or housing formation, declined during the 2010s, mostly due to a combination of younger adults living with their parents, and a move toward urban centers
where renting is
more prevalent.
Wealth
Continued on page 49
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Principal Financial Advisor 413.297.6074
26 JULY 11, 2022
WEALTH MANAGEMENT
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