Charlie Mungerthe 99-year-old billionaire and vice chairman of Berkshire Hathaway Inc., expressed concern that the United States is heading for another financial crisis. In an interview with the Financial Times, Munger pointed to the troubled situation of commercial real estate loans held by US banks, stating that many of them would qualify as “bad loans” due to declining real estate values. He stressed that this is a negative outcome for the US commercial real estate market.
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“It's nowhere near as bad as 2008,” Munger said, acknowledging that the fallout from the bursting shouldn't be as catastrophic as the 2008 collapse.
But he warned that problems can arise in banking just like anywhere else. In good times, bad habits can develop, and in bad times, banks can incur significant losses. Big losses can lead to a credit crunch, which in turn triggers a chain reaction throughout the economy, potentially leading to a recession.
Recalling the sharp decline in the US housing market over the past year, Munger noted that many properties are no longer as valuable as they used to be. Office buildings, shopping malls and other real estate are in trouble, causing significant problems in the market.
He also noted that banks across the country have tightened their lending practices for real estate loans. “Every bank in the country is a lot tighter on home loans today than they were six months ago,” Munger said. He also mentioned the recent turmoil in the US banking system, citing the closures, bailouts and near-collapses of Silicon Valley Bank, Signature Bank and First Republic Bank as contributing to a crisis of confidence.
Considering his extensive experience by the way Warren BuffettMunger, CEO of Berkshire, believes that banks will face challenges with their commercial real estate portfolios due to the decline in property values and the increase in office vacancies. Still, he believes these obstacles will be milder compared to the Great Recession of 2008.
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Contrary to memories of the 2008 financial crisis, when signs of foreclosure were rife and the housing market collapsed, a possible downturn in 2023 would likely be different.
A key difference between the current housing market and that of 2008 lies in the health of its underlying fundamentals. Before the Great Recession, banks easily lent to underqualified borrowers, leading to risky subprime mortgages. Supervision was lax, leading to a housing bubble that eventually burst, leaving financial institutions and investors with trillions of dollars in worthless mortgages and mortgage-backed securities.
Although Munger expressed his concerns about commercial real estate, the residential real estate market is not in the same boat. Although the Federal Reserve has been steadily raising interest rates to combat inflation, home values have not fallen dramatically. Foreclosures are still rare.
The increase in house prices in 2021 can be attributed to a number of specific factors that do not resemble a bubble. Several factors contributed to this trend, including limited growth in the supply of homes for sale, a rising proportion of people aged 25-40 who are traditionally buying homes, a robust economy, and a slight easing of lending standards for creditworthy borrowers.
Berkshire Hathaway, known for its investments in banks including Goldman Sachs and Bank of America, has supported the sector through previous financial woes. Acknowledging the difficulties of running a bank, Munger stated, “It's not that easy to run a bank intelligently, there are many temptations to do the wrong thing.”
Despite Berkshire's longstanding investments in insurance companies, neither Munger nor Buffett approve of the volatility associated with commercial real estate loans. Munger pointed out that the decline in real estate values, particularly in office buildings and shopping malls, is unlikely to reverse anytime soon, especially as remote work remains prevalent. To mitigate the risk, some banks have already begun to scale back commercial real estate lending.
Investing in a turbulent market
The Berkshire Hathaway legends have a lot to say when it comes to investing, especially during a downturn. Buffett's famous quote “Be fearful when others are greedy and be greedy when others are fearful” is a key dictum of the Oracle of Omaha. Ultimately, there are many strategies for investing during downturns, but Buffett tends to boil it down to the same strategy he uses for investing in normal market conditions: Find valuable companies with cheap valuations and hold them for the long term. It's just a little easier when everything's broken.
Compressed valuations tend to occur in the start-up market when the stock market falls. When valuation multiples fall in the public markets, they cause falls in the private markets. That means there could be opportunities for startup investors on platforms like StartEngine, allowing anyone to invest in startups.
For more information, see startup investments by Benzinga.
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This article, according to Charlie Munger, that the US is on the verge of a “mild” recession but that 2008 will not happen again, originally appeared on Benzinga.com
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