‘Big Short’ investor who predicted 2008 housing crisis warns of another financial disaster

A “Big Short” investor who predicted the 2008 housing crisis fears history could repeat itself because the mortgage market is underestimating the systemic risk posed by flooding.

Dave Burt, CEO of investment research company DeltaTerra Capital, made millions off the subprime mortgage crisis while working for New York-based Cornwall Capital.

Cornwall’s success was later profiled in Michael Lewis’ bestselling book “The Big Short,” which detailed the lead-up to the 2008 economic collapse.

More than a decade later, Burt said he believes the mortgage market is overlooking flooding as the potential catalyst for another housing crash.

DeltaTerra’s research suggests that 20% of US homes have “meaningful exposure” to a mispricing issue because of floods, making the housing market worth up to $200 billion less than the $45.3 trillion it was valued at in 2022, he said.

“We think of this repricing issue as maybe a quarter of the size and magnitude of the [global financial crisis] in aggregate, but of course very, very damaging within those exposed communities,” Burt told CNBC over the weekend.

Burt warned that a 2008-style price correction is due if lenders don’t recognize the potential fallout from flood risks. Homes wrecked by a flood become worth dramatically less than before the climate crisis, putting mortgage borrowers at risk of not being able to pay back their loan.

“Ultimately, until people have good information about what these climate-related costs are going to look like, we’re creating new problems every day. I think that’s really the crux of the matter,” he said.

The investor’s theory on flooding isn’t new. He also shared his worries about brewing flood risks with CNBC in April.

“I’m always on the lookout for these big systemic issues and there’s a few reasons for that,” he told the outlet via videoconference.

“If something is mispriced, then as an investor, which has been my job for most of my career, your main opportunity to add value is to identify something that is either too cheap to purchase for your clients or something that it is too expensive to sell for your client,” he added.

He pointed to single-family homes as the most at-risk types of properties in floods, the most common natural disaster to take place in America.

Burt pointed to Hurricane Ian, which made landfall last September and caused more than $100 billion in damage — the third-costliest in US history, according to the National Oceanic and Atmospheric Administration.

Hurricane Ian revealed cracks in Florida homeowners’ flood insurance, with many residents battling over compensation checks that didn’t cover the cost of damage to their homes, which were left unlivable in the wake of the flood.

“When you buy a home, one of the most important considerations is the cost of maintaining that home and I think so many important decisions are made based on that,” Burt told CNBC.

Burt’s comments come at a time when month-to-month home sales are volatile.

In April, sales of new US single-family homes hit a 13-month high.

Last month, new home sales increased 4.1% to a seasonally adjusted rate of 683,000 units, the highest reading since March 2022, according to the Commerce Department.

The boost was attributed to a persistent shortage of previously owned houses on the market.

This month’s sales pace, however, was revised lower to 656,000 units as sales, inventory and months’ supply data see rates more similar to what they were in January 2018, before the pandemic.

New home sales are counted at the signing of a contract, making them a leading indicator of the housing market. They’re known to be volatile on a month-to-month basis.

The National Association of Realtors last week reported price rises in roughly half of the country, multiple offers and many homes being sold above list price.

Inventory of existing homes, meanwhile, remains 44% below its pre-pandemic levels, according to the association’s data.