A ‘Big Short’ investor sees disaster brewing in housing markets

More than a decade after a U.S. mortgage meltdown threatened to destroy the international financial system, a “Big Short” investor once again sees financial disaster brewing in the real estate market.

Dave Burt, CEO of investment research firm DeltaTerra Capital which aims to help clients manage climate risk, was one of the few skeptics who recognized the housing market was on the brink of collapse in 2007.

He helped two of the protagonists of Michael Lewis’ best-selling book “The Big Short” bet against the mortgage market in the lead-up to the 2008 global financial crash. As it turned out, they were right and made billions.

Now, Burt believes an overlooked climate risk could see history repeating itself.

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

“Professionally, 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 said.

“From a personal perspective, and this is partly based on that professional perspective, I’ve seen when that goes wrong, how impactful that can be on economies and society and our most vulnerable. And I’m really thinking through the post-global financial crisis period here in the U.S. from 2008 to 2012 where there was a huge amount of human suffering.”

Burt said DeltaTerra Capital’s research suggests that 20% of U.S. homes have “meaningful exposure” to a mispricing issue because of flood risk. If realized, he warned the fallout could resemble the extraordinary correction seen during the global financial crisis.

“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 said.

His comments come at a time when the housing market is currently experiencing a major fundamental shift because of higher mortgage rates and as global central banks keep up the fight against inflation by hiking interest rates.

In turn, Burt says some cracks are starting to appear in the terms of the cost of insurance. He noted the recovery in Florida from Hurricane Ian was an issue he’s watching closely, particularly because this storm surge exposed a flood insurance nightmare for homeowners.

“Will they become chasms this year? I’m not sure,” Burt said. “But an observation of the highest frequency fundamental data on home sales and home inventories indicates that…