- Jeremy Grantham expects US house prices to fall over the next few years.
- The GMO co-founder sees the S&P 500 plunging as low as 2,000 points, a drop of 52%.
- The elite investor warns that the recent banking turmoil could put a strain on other parts of the financial system.
Prepare for a prolonged decline in U.S. house prices, a potential 52% drop in the S&P 500 and more banking troubles, Jeremy Grantham has warned.
US homes are very expensive relative to household incomes, and soaring mortgage costs have eroded people’s purchasing power, according to market historian and co-founder of GMO says CityWire in a recent interview.
As people realize their properties are worth far less than they thought, they may feel poorer and cut back on foreign travel, higher education and other big-ticket items, a predicts Grantham. Lower spending could temper economic growth, he noted.
“It doesn’t happen overnight, but housing casts a very long shadow and is economically more dangerous than the stock market,” Grantham said. “The bad news is that it moves very slowly. The last time was in 2006 and it only bottomed out in 2012, it took six years.”
“I don’t expect a crash, but I do expect house prices to become more affordable again,” he added.
The veteran investor has sounded the alarm over a “super bubblecovering stocks, bonds and real estate in January 2022. He attributed the asset price boom in part to near-zero interest rates, which encouraged saving over spending and made l very cheap loan.
However, in an effort to rein in historic inflation, the Federal Reserve has raised rates to around 5% for the past 13 months or so. US central bank actions have raised the cost of mortgages, auto loans, credit cards and other types of debt.
In addition to a housing downturn, Grantham predicted a sharp drop in stocks. The S&P 500 should dip between 27% and 52% compared to its current level of 4,130 points, it says CityWire.
“The best we can hope for is that this market would grow to around 3,000,” he said. “The worst we should fear is more like 2,000.”
Knowing that might sound extreme, Grantham noted that the benchmark reached 666 points in 2009, meaning that if it bottoms out at 2,000 points this time around, it will still have tripled over the course of 2009. of the past 14 years.
Grantham also nodded to the collapse from Silicon Valley Bank and Signature Bank in March, which sent shockwaves through the financial system and stoked fears of a credit crunch. He advised bond investors to be cautious as further banking turmoil could threaten attractive bond yields.
“We seem to be running the possibility of continued financial stress,” he said.