I am a bit leery about linking to Mr. Paulson. Since his astounding success shorting housing going into the Great Financial Crisis he has made some equally astounding mistakes.* However, some of his points on the current housing market are worth plugging into the reptile brain to, if for no other reason, facilitate the creation of parameters for the mental matrix.
What is coming in housing will potentially be very profitable but also very different vs. 2007 -2009.
From Bloomberg via Yahoo Finance, Sept 25:
John Paulson became a billionaire after his hedge fund effectively shorted more than $25 billion of mortgage securities at the dawn of the global financial crisis.
As he sizes up yet another frothy housing market some 15 years later, the founder of Paulson & Co. says another downturn in US home prices may be in the cards -- but the banking system is in a much better condition to handle it.
Paulson sat down with Bloomberg for a wide-ranging interview at the Union League of Philadelphia’s Business Leadership Forum on Tuesday. He also discussed how the so-called “Greatest Trade Ever” influenced his investing afterward, as well as why gold prices have been falling. Below are some of the highlights of the conversation, which have been lightly edited for clarity.
Q: You set your sights on the real-estate market about 16, 17 years ago. Basically you surmised that the US was in a housing bubble and that the huge market for mortgage securities was bound to be in trouble when prices collapsed. I’m curious if we could bring that into the present tense, because I look at how so much has changed since then: Underwriting standards have sobered up quite a bit; the banking system is much more inoculated; there are better capital requirements, a lot more regulations in place. But I look at the appreciation in home prices since the beginning of 2020 -- the Case-Shiller index is up 40-some percent -- and over the same period, mortgage rates have jumped to more than 6%. It seems like we could be in for some pain in the housing market. I wonder how well inoculated is the financial system? Compare and contrast now versus then.
A: Well the financial market, the banking system and the housing market are much different today than in ‘06 and ‘07. The underlying quality of the mortgages today is far superior. You don’t even have any subprime mortgages in the market … And the FICO scores are very, very high. The average is like 760. And the subprime, they were averaging 580-620 with no down payment. So in that period, there was no down payments, no credit checks, very high leverage. And it’s just the opposite of what’s happening today. So you don’t have the degree of poor credit quality in mortgages that you did at that time....
In 2014 it was "As John Paulson Discovers Once Again: Risk-arbitrage Is Pronounced with the Accent On the First Syllable"
In 2018: "John Paulson’s Merger Arbitrage Fund Plunged at the Start of the Year
Well then it wasn't an arbitrage, was it?
More Than a Trade: Career Tips from John Paulson (But Wait! There's More!)
