Michael Burry Chimes in...When it comes to housing, it’s the interest rates, stupid
The Big Shorter declares "Random Walk is correct! There is no affordability-shortage crisis, but there is a 30-year fixed rate mortgage subsidy crisis"
Republishing this short piece from August 2025 to celebrate the occasion of Michael Burry’s recent realization that Random Walk has been right about the housing market all along (as if that wasn’t entirely obvious by now).
First, the Burry prelude.
And then, the post from the archives:
It’s the interest rates, stupid
decline in home values is obvious, if you know where to look
CRE values are down, rents are down . . . but owner-occupied single-family homes just go up? Puh-lease.
St. Louis Fed confirms: Random Walk is right, it’s the interest rates, stupid
Decline in existing home values is showing up in clearing prices
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As longer-term Random Walk readers know, the non-existent “housing shortage,” is (and remarkably continues to be) the wrongest thing that most people believe to be true.
The proof has been in the pudding, as RW correctly took the under on all home price forecasts, while homebuilders consistently print GFC-level margins, reflecting the modest housing surplus, the nation currently enjoys. What the commentariat casually refers to as an “affordability crisis because NIMBYism” or whatever, is in reality a bid-ask “crisis” driven by the only actual “broken,” thing in the housing market, i.e. the 30-year fixed rate mortgage.
We either kill the 30-year, or . . . we wait. Those are the solutions. Sorry, I don’t make the rules.
A nice places to live shortage? Yes, we’ve got one of those.
A misallocation of large empty nests? Yes, perhaps something along those lines, as well.
But a housing shortage? Not in this universe.
Shortage-Bros will likely never fully capitulate, but every now and again, there is a defection. The latest is Michael Burry of Big Short fame who has now chimed in to say “Random Walk is correct—the problem in housing is a dislocation of the mortgage subsidy.”
Not quite in so many words, but you get the idea.
Burry then goes off the rails a bit when he concludes “and that’s why we should privatize the GSEs,” but he can be forgiven, I suppose, because while “privatizing” the GSEs probably wouldn’t do much to help the housing market, it would be quite beneficial to the equity-holders of the GSEs. I mean, who wouldn’t want to own a piece of the nation’s biggest mortgage lender with a free risk-transfer courtesy of the taxpayer?1
Anyways, let’s hear from the Big Shorter himself:
We studied housing square footage per capita adequacy, and found that there is no problem there. The US in fact has more residential square footage per capita than any other country in the world. This is not a housing shortage, despite what so many say.
I mean, weird way of putting it, but yes, no housing shortage. Check.
What else?
The problem is that bigger houses are inefficiently housing fewer people. The post-COVID low rate environment locked people into a lifecycle real estate position. Empty nesters can't sell, first time home buyers cannot buy. Second-hand home inventory is near all-time lows due to record low supply, not record demand. Prices are high due to the same reason.
Home equity is now a record $35 trillion, nearly doubling pre-COVID levels. 40% of homeowners own their homes free and clear - a record. And about 30% of all home buyers pay for homes without borrowing. Older homes were upgraded at a record pace during COVID, extending and refreshing the usefulness of residential real estate.
Again, with the word salad, but, true enough, what we have is (a) something of a misallocation of housing; and (b) not a too-much-demand problem, or a net-new supply problem, but a “won’t sell” problem.
The phrase “lock in” is a misdirection, because Burry correctly points out that ~40% of homeowners have no mortgage (and the “mortgage lock-in effect” is not actually a thing), but the expression he is looking for is “sticky prices,” (and “unmotivated sellers”).
He prefers “lifecycle real estate position,” (lol wut?), instead. Not a wordsmith. That’s ok.
But, here’s where he gets closer to the heart of the matter:
Artificially low interest rates, ~$6-7 trillion in helicopter cash and forgivable loans helped drive both the home updates and high housing prices.
Work from home moved the office into the home, often expensed or deductible. People with white collar jobs and means chose to live/work in exotic or remote locations.
All of this together does not speak of a housing shortage, or a housing problem.
Instead it is a problem of current residential space allocation and mobility, and this problem was created by government manipulation of interest rates, cash money supply, and COVID lockups that went on too long and changed work/home behavior.
Allow me to parse this in a way that, well, actually makes sense.
Thing one: the specific pandemania “affordability crisis” was a massive pullforward of demand driven by temporary-ish lifestyle changes and a boatload of subsidies (and NIMBYism ain’t got nothing to do with it).
Thing two: at a deeper, more structural level, heavily subsidized mortgage rates—not shortages—are the straw that stirs the home values drink.
Correct, again, Mr. Burry. You’re on a roll. Please, continue:
Government created the problem and now maintains policies that prevent free markets from reaching a solution, not the least of which is keeping the GSEs inefficiently run while in conservatorship. Recall Pulte's video upon arriving at Fannie Mae - no one was in the office buildings. The companies have become atherosclerotic, inefficient government programs, while a decade of financial engineering optimized for homeowner wealth accumulation rather than housing market velocity/mobility/fluidity.
Government must fix this problem by facilitating efficient re-allocation of housing stock with higher housing velocity/mobility through the release of the GSEs into free markets.
This is a problem made for the GSEs. Through well-targeted programs, the GSE can help the free market find spaces to intelligently reallocate , and help US citizens with housing mobility.
Building more new overpriced, poorly built homes in increasingly dangerous flood zones and other hazardous fringe areas is not the solution. It adds to the problem through high maintenance burdens on new homeowners with little equity in their homes.
Rather, to build mobility/velocity of homeowners and housing space, the GSEs need to be recapitalized and retain easy access to capital markets. They also need to be run by real mortgage executives, not government functionaries.
To achieve this they need to exit conservatorship in a manner that excites markets to fund these companies, now with guidelines to prevent risk-taking outside of their purpose, and grow their purchases of mortgages of well-targeted specification.
Here again, one has to read between the lines a bit to tease out the gravamen of Mr. Big Short’s argument, but the key is to first turn the page at a 90 degree angle, and . . .
Nah, this just doesn’t make much sense, as best as I can tell.
I’m pretty sure this is the “going off the rails” part where Burry just wants to make a boatload of money by owning part of a boondoggle and, in his defense, it’s pretty hard to make a coherent argument for why socialized risk ought to be privately profitable, so instead he throws a lot of isht at the wall about “flood zones,” “mobility/velocity,” “real mortgage executives,” and “well-targeted specification,” and I suppose that’s as good an approach as any.
I too want “housing space,” and not “hazardous fringe areas,” so pay me, damn it.
Look, let’s be honest, the point here is Random Walk likes being right about things, and a famous investor personality said at least one thing that Random Walk really likes being right about, i.e. “there is no housing shortage,” and the rest is, I suppose, open to interpretation, but fun nonetheless.
Burry prelude complete.
Now, on to the republished oldie, but goodie, from Aug. 8, 2025:
When it comes to housing, it’s the interest rates, stupid
A brief reminder that there is no “housing affordability-shortage crisis,” but there is a 30-year fixed rate mortgage crisis.
Home values are coming down (because it’s the interest rates, stupid)
There is, of course, no housing shortage (and here), no affordability crisis, no lock-in effect, and no perma-upward-ratchet in home prices.
All that there is are sticky prices and unmotivated sellers. But just because transactions aren’t clearing, doesn’t mean that values haven’t declined (because they have).
When rates go up, asset prices go down, especially when the asset is heavily financed, like a car, or real estate. With higher borrowing costs, purchasing power goes down, therefore prices go down. It’s that simple.
The reason it doesn’t look like existing homes have gotten cheaper (as opposed to new homes where price depreciation is indisputable)2 is solely because existing homeowners are less inclined to sell in a downmarket, and they don’t really have to.
Banks bear the decline in home values, for the most part
All those increased borrowing costs are born by their banks, who are locked-in to low-rate 30 year mortgages—the loss in value shows up as “unrealized losses” on their balance sheets:
Low-interest mortgages have lost hundreds of billions in value, but the underlying collateral just gets more valuable . . . sure sure.
If you wanted to “fix” the housing market, the correct and effective solution would be to convert 30-year mortgages into floating rate or shorter-term fixed mortgages. If you did that, homeowners would be forced to internalize higher borrowing costs, and they would be much more inclined to sell—at prices that would actually reflect prevailing borrowing costs.
CRE values are down (because their mortgages aren’t 30 years long)
In other words, homeowners would become more like institutional property owners, and you’ll never guess what’s happened to the values of institutionally-owned properties:
Green Street’s commercial property price index shows property values lower than before the pandemic, with residential assets specifically, a bare 10% more pricey than they were seven years ago (and 20% lower than their pandemania peak).
10% appreciation over 7 years, is not very impressive, at all. Little wonder that RE-bros cannot raise money:
Real Estate fundraising is the absolute pits.
Why would no one want to invest in the asset that only goes up?
Rents too, are going down.
CBRE just revised all their rent estimates to the downside:
Every major market (except SF, LA, and Orange County) just got a downward revision in estimated rent growth.
Elsewhere, we know that median asking rents for new apartments has been in decline for ~2 years.
If you’re a shortage-affordability bro, how do you explain that divergence between CRE and owner-occupied? The answer is ‘you can’t.’
If, however, you accept reality, then the divergence makes perfect sense: CRE investors do not get 30-year fixed rate mortgages. They might get 5-year fixed rate mortgages, but then they have to face the music (and so asset-values fall).
St. Louis Fed confirms “Random Walk is correct—the affordability crisis is actually just a 30-year fixed rate mortgage crisis”
Not only is it intuitively obvious that the 30-year fixy is causing the distortion, the St. Louis Fed just did some research to prove it.
Sweden and Canada, where shorter-term and adjustable rate mortgages predominate, real home values are either breakeven or lower.
US home values, by contrast, remain curiously stable.
It’s not curious, though. It’s still just this:
Sticky prices, unmotivated sellers.
No shortage. No affordability crisis. None of that.
Ability to pay is an outer limit:
Monthly home payments, as a % of disposable income, are remarkably stable since 1990 (“housing crisis,” notwithstanding).
People can’t just manifest more money to throw at homes—they’re constrained by their incomes, and their borrowing costs. If the latter goes way up, while the former only goes up a little, then home values come down.
In any event, home values are coming down
Again, that home values would come down—even for existing homeowners—in a higher rate environment has always just been a matter of time.
Eventually, slowly, but surely, homeowners would have reason to sell, and they will have to find buyers where they are.
In the Southwest and West Coast, that’s already happening:
About 1/3 of major US markets are experiencing resale price declines.
There are still some primo locations where when the occasional house actually trades, it’s trading for more than before, but on a volume basis, they are the exception, not the rule.
And price declines aren’t just happening in YIMBY-paradises like the Southwest. CA, Colorado, and the pacific northwest are experiencing the same thing.
Random Walk’s favorite indicator (and recent meme-fancy) Opendoor OPEN 0.00%↑, shows the same thing:
Opendoor shows negative price appreciation, trending lower than last-year, and much lower than the post-GFC average.
Home values are coming down.
I don’t make the rules. I just watch the rules playout as expected.
Previously, on Random Walk
Private Credit and Insurance, two peas in a pod (reprise), and a chart dump on default rates
five charts on the rise of private credit in life insurance
Energy in 1776
It’s July 4th, so Happy Birthday America, and we’re going to keep it light and only semi-topical.
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Bill Ackman, similarly, has thoughts and feelings. Ackman is, on the one hand, right that the GSEs have amply rewarded (and then some) the federal gov’t for its GFC bailout. Ackman is also right that the Obama admin rather capriciously changed the terms of the bailout to further enrich itself. What, on the other hand, Ackman neglects to mention is that the GSEs operate with a business model fundamentally premised on an “implicit,” but let’s be honest, explicit, taxpayer guarantee.
