The investing world is on DEFCON 1 right now. Inflation is plaguing the market, and recession fears become more real with each passing week. Add in foreign policy woes and an energy crisis and there’s no wonder that investors are nervous. One area of particular concern is the housing market. With prices soaring ever higher, and the economy balancing on a razor-thin wire, is a housing market crash in the cards?
There’s almost certainly hardship ahead. But, if you’re looking for a real replay of the 2008 crisis, look no further than the crypto crash.
America’s housing market faces unprecedented home prices and soaring demand. But it is the crypto crash that most closely resembles the last housing crisis. From over-leveraged DeFi platforms to Warren Buffett-esque billionaire saviors, the crypto crash is showing convincing parallels with 2008.
But, could this crypto crash have an effect on the broader financial world?
Crypto is a microscopic industry compared to the housing market and the broader stock market. Recent polls show that between 12% and 21% of Americans have traded crypto — not a negligible number, but nowhere close to the amount of people investing in stocks. However small the investor base, though, the market was worth trillions of dollars at its peak. As a result, experts are arguing over whether the crash will spill over into the traditional investing sphere.
How the Crypto Crash Resembles the Housing Market Crash
Investing influencer Ian Dunlap recently laid out some of the most convincing parallels between the crypto market and the 2008 housing market. On his podcast, Market Mondays, Dunlap points out that crypto investors have over-leveraged themselves in the same way homeowners did.
“Over-leveraging leads to disaster,” Dunlap said. “What’s causing and accelerating this crash is over-leveraging like crazy.” He went on to explain this take with the recent trend of speculative investors and institutions taking out massive crypto loans as leverage to buy more assets. Taking on this “good debt” has, up until the crash, been a way for investors to multiply crypto income many times over.
Of course, this is quite similar to the housing market of 2008. Back then, homebuyers were taking out subprime mortgages to buy houses they couldn’t afford. This would obviously lead to the subprime mortgage crisis where homeowners massively defaulted on these loans.
The crypto firms filing for bankruptcy due to massive debts validate this take. Companies like Voyager Digital (OTCMKTS:VYGVF), Three Arrows Capital and Celsius have failed to meet margin calls and piled up debt. Now, two of the three are filing for bankruptcy.
Celsius is one of the most integral companies to the market collapse. It helped cause the collapse of Terra Classic (LUNC-USD) when its large sales of TerraClassicUSD (USTC-USD) helped de-peg the stablecoin and ultimately collapse the network, leading to the crypto crash. With such large exposure to the network, Celsius ended up $800 million in debt.
Another aspect of the crypto crash which Dunlap compares to 2008 are the savvy investing conglomerates bailing out these companies. The crash is making for a new generation of saviors in figures like FTX founder Sam Bankman-Fried. Bankman-Fried is capitalizing on the crash through a series of bailouts — most notably, his company’s deal with BlockFi for $240 million. Other companies aggressively acquiring over-leveraged peers are Nexo (NEXO-USD), which is in the process of buying Vauld, and Ripple, which is reportedly seeking out acquisitions in the midst of the crash.
The Crypto Bubble Popped. Will It Cause a Broader Recession?
Crypto is the hottest new investing space in America. Trillions of dollars have found their way into the market in a short amount of time. However, it won’t have the same effect on the market as the dot-com bubble, according to experts.
Crypto essentially exists within a vacuum. Most often, the only companies interacting with crypto are the platforms themselves, VCs and asset managers tailor-made for crypto investing like Grayscale, Voyager Digital and a16z. Yes, mainstream VCs like Tiger Global and Sequoia Capital have some exposure to crypto. But, it’s not nearly close to the billions invested by crypto-specific VCs.
This vacuous nature is why when the crypto crash happened, it didn’t affect many stocks outside of crypto miners and companies with heavy exposure like MicroStrategy (NASDAQ:MSTR). For the rest of the market, this had no affect. As economist Joshua Gans reminds us, crypto is not used to collateralize real-world debts. These losses are paper losses.
The crypto industry might not cause a broader market recession. But, it’s certainly a symptom of an uncertain market environment.
Take Galaxy Digital CEO Mike Novogratz’s recent comments on the state of the market as one piece of evidence; he highlights the growth of the industry in recent years was propelled largely by Covid-19. “It’s hard to not underestimate the huge impact that the response to COVID-19 had on all assets,” he said. “We pumped so much liquidity into the markets it was crazy, we had never seen anything like it.”
The reason crypto saw its massive growth was because a ton of speculative investors were injecting liquidity into the market. Of course, the first shoe to drop was the Terra collapse. But, the greater crypto crash had started because of the flight of liquidity out of the market. We are seeing a flight of investors out of risky stock investments now, indeed. But, it’s not due to the crypto crash. Rather, tightening financial policy is to blame for this behavior.
Doesn’t This Mean a New Housing Crash Will Be Just as Bad as 2008?
As the market liquidity of real estate rises dramatically — especially in the wake of the pandemic-fueled seller’s market — there’s no doubt that the housing market is in a similarly swelling bubble as crypto. These soaring house prices, coupled with rising inflation and mortgage rates, have got to eventually give. But just because the two bear similarities doesn’t mean that a housing market crash today would look like 2008.
Most notably, homeowners aren’t as over-leveraged as they were in 2008, or as crypto VCs are now. Adjustable-rate mortgages (ARMs) are not nearly as popular today as they were then. Now, more people are opting for fixed-rate mortgages. Moreover, Americans aren’t delinquent on their repayments as much as they were 14 years ago. Of course, pandemic-fueled forbearance programs have been a major factor in keeping these figures low.
As InvestorPlace Market Analyst Tom Yeung predicts, the real estate bubble won’t see the same pop caused by high interest rates and foreclosures as 2008. Rather, this bubble will slowly air itself out. More people will get priced out of the exorbitantly expensive current environment, especially as the Federal Reserve continues its rate hikes to combat still-rising inflation. Simply put, enough people will be forced into the waiting game that the supply-demand imbalance will work itself into equilibrium naturally.
On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.