'The great unwind': A hedge-fund chief overseeing $2 billion explains how a ripple effect could take down the housing market - and says 'we're just at the beginning'

Advertisement
'The great unwind': A hedge-fund chief overseeing $2 billion explains how a ripple effect could take down the housing market - and says 'we're just at the beginning'
housing crisis foreclosure great recession

REUTERS/Robert Galbraith

Advertisement
  • Mark Yusko, the CEO and chief investment officer at Morgan Creek Capital Management, thinks the real-estate market is "about to get crippled."
  • The reasoning behind his grim outlook stems from an amalgamation of high unemployment, high leverage, flatlining revenue, and flailing REIT performance.
  • Yusko said "it's going to get ugly-ugly" and that this was just the beginning.
  • Click here for more BI Prime stories.

"The real-estate market is about to get crippled - I mean, crippled. It's going to get ugly-ugly."

That's what Mark Yusko, the CEO and chief investment officer at Morgan Creek Capital Management, said in a live YouTube chat in reference to the economic spillover effects prompted by the coronavirus.

"There are so many things that are just going to slam real estate here," he said. "We're just at the beginning of the great unwind."

At the heart of Yusko's thesis lies the US job market.

Advertisement

"We just took 10 million, and that number is probably light by half - so 20 million people pushed out of work," he said. "No sign of when we're all going to get back to work, and people aren't going to be able to pay rent; they're not going to be able to pay their mortgage."

Above, Yusko is referencing the latest numbers for initial jobless claims. In the week ending March 21, 3.28 million Americans filed for unemployment benefits. Last week, 6.64 million filed.

Here's what those numbers looked like when juxtaposed against history.

Initial jobless claimsAndy Kiersz/Business Insider

Yusko's theory seems to be playing out in real time. On April 8, The Wall Street Journal reported that almost one-third of US renters didn't pay their rent.

Advertisement

But that's not necessarily what frightens Yusko the most. He's also concerned about the amount of leverage in the system.

"There's going to be a ripple effect from the people who had a property; then they levered up that property to buy another property; then they levered up that property to buy another property - and you see this in Airbnb," he said. "If you had an Airbnb property, it was a nice little business."

He added: "Well, if you had 10 properties that were all cash flowing quite nicely pre-COVID, now suddenly no one can travel - and so you have no revenue. That's going to unwind."

Before much of the world went on lockdown, Airbnb bookings were down as much as 96% in some locations. Earlier this week, Business Insider's Troy Wolverton said the formerly red-hot company - which was planning an initial public offering before the coronavirus struck - could run out of cash in just one year, even after raising $1 billion.

To Yusko, the combination of high leverage, increasing unemployment, zero cash flows, and no travel is a recipe for disaster.

Advertisement

"That's going to put pressure on markets," he said. "And with people out of work, I just think it spirals in a way that we can't even really comprehend yet."

This outlook mirrors one laid out recently by Moody's Analytics. The firm said a protracted real-estate slump could result in about the same level of GDP contraction and disruption as the Great Recession.

Read more: 7 charts show how the coronavirus could clobber real estate, from retail vacancies of nearly 15% to plunging office rents in Texas cities

But that's not all. Yusko said real-estate investment trusts were nearing a day of reckoning - and that would hurt everyone.

"The little guy always gets screwed," he said. "The mortgage REITs, which buy mortgage-backed securities ... bundle all these mortgages into securities, they sell them off, and then these mortgage REITs buy them, and they yield 3, 4%. And then they borrow at 1%, and they [arbitrage] the spread. And they lever up 10, 12 times."

Advertisement

He added: "What happens is these things get unwound. If you look at them they're down 70, 80, 90%."

The little guy that Yusko refers to above is the average 401(k) investor who owns REITs as part of a diversified portfolio - and that person just lost a substantial amount of their investment.

"We have a lot of people who should never have gotten loans on property that just can't cash flow - and it's going to go down a lot," he said.

Do you have a personal experience with the coronavirus you'd like to share? Or a tip on how your town or community is handling the pandemic? Please email covidtips@businessinsider.com and tell us your story.

Get the latest coronavirus business & economic impact analysis from Business Insider Intelligence on how COVID-19 is affecting industries.

Advertisement

NOW WATCH: 3.3 million Americans filed for unemployment - and an economist predicts it could be far worse than the Great Recession

{{}}