Understanding the Current Housing and Economic Reality: A Conversation with Dr. Chris Thornberg

We recently sat down with Dr. Christopher Thornberg, the founding partner of Beacon Economics, to address a series of questions that are helping us frame our outlook on housing, the economy and the fiscal policies driving it. Known for his contrarian but historically accurate calls, most notably his early prediction of the 2007 subprime mortgage crash, Thornberg offered a thoughtful analysis that challenges the prevailing wisdom on everything from the inventory crisis of housing to the future of the American economy. His message for 2026 is clear: The danger might not be the trade wars everyone is watching. It is more likely the reliance on Artificial Intelligence investment and questionable fiscal policy. If that bubble pops as suggested, prime real estate may look even more attractive as an asset class than it does now.

Real Estate as an Asset Class

For the past two years (though it feels like five), real estate professionals have blamed high interest rates for the market's sluggishness. Thornberg argues the inverse is true. "Actually, it would be better to say that low rates killed the housing market," Thornberg told me. He places the blame squarely on the Federal Reserve’s handling of the pandemic economy, which pushed rates to ultra-low levels before aggressively hiking them to combat the resulting inflation. The result is a massive cohort of homeowners "trapped" by their financing. At West LA Real Estate group we agree and go further to say the bad fiscal policy with interest rates goes back in time much further and this era of ZIRP (Zero Interest Rate Policy) era led to persistent inflation exacerbated by the Covid-19 pandemic.

"Many households are now trapped by their interest rate, unable to afford a similar residence at a higher interest rate within their community," Thornberg explained. "They will not sell, and it is this lack of inventory that is keeping the market so illiquid." While the 'golden handcuffs' of low interest rates are the immediate culprit, Thornberg sees deeper structural issues at play in California. He points to Proposition 13 and capital gains taxes as long-term drivers of illiquidity. "Ultimately, an efficient housing market is a liquid housing market," he noted, "but regulators pay scant attention to this issue."

The Broader Economic Picture

Looking toward 2026, many investors are bracing for turbulence driven by new tariffs and trade wars. Thornberg dismisses these fears as a distraction. "We have been very clear that while tariffs are not a good idea, they certainly have had very little negative impact on the economy," he said.

Instead, Beacon Economics is tracking a different threat: a speculative mania in the technology sector. Thornberg describes an economy distorted by an "AI bubble" and a "flood of foreign capital flowing into the U.S. chasing the outsized and unsustainable returns" generated by that bubble. The correction, he predicts, will be painful. "When the bubble pops, the U.S. is likely to see a falling U.S. dollar and rising interest rates," Thornberg warned. This combination would typically spell disaster for asset prices. However, he draws a sharp distinction between the stock market and the housing market in terms of valuation. "Real estate is far less overvalued than equities," Thornberg said. With overall housing supply remaining tight, he views the luxury market not as a casualty, but as a hedge. "All this suggests that coastal real estate is a point of stability in a contracting asset market. It will clearly be a port in the coming storm."

The 2-tier Economy

We also touched on our belief that the U.S. has split into a "two-tier" economy, one where the rich get richer while the rest live paycheck to paycheck. While acknowledging that gross incomes for the top 5% have grown faster than the bottom 95%, Dr. Thornberg argues that when you look at the 'all-in' costs, the lower-income demographic receives significant benefits from the expansion of public programs.

"Once we account for taxes paid and the full value of government benefits received which currently amount to more than $4 trillion per year we find that the biggest winners in the economy are the top 20% and the bottom 20%," he said, citing regressive tax cuts for the former and program expansion for the latter.

The real structural risk, according to Thornberg, isn't inequality, but insolvency. "The real problem is that everyone is living above their true means," he said, driven by a $2 trillion federal deficit. "At some point in time Americans will need to tighten their belts and the false narrative of American decline... will be sure to cause this to be an ugly political situation."

The Takeaway for Investors

The inventory shortage is likely here to stay as new starts for housing fell by about 10% YoY, anchored by structural tax policies in Prop13 and "golden handcuffs" on homeowners with 3% mortgage rates who dont want to or cant switch to comparable housing at higher cost of ownership. However, for those holding capital, the potential volatility in equity markets, driven by speculative investment and high price-to-earnings multiples, makes the search for comparatively undervalued assets critical, positioning real estate as a highly attractive alternative. If the "AI bubble" bursts as Thornberg predicts, the scarcity of prime coastal homes will likely preserve their value better than most asset classes, especially if inflation comes to a head.

West LA Real Estate Group led by Robert Schmalz: The West LA Real Estate Group is a premier advisory team specializing in the West Los Angeles residential market. By combining institutional financial acumen with tenured local expertise, the group helps clients navigate complex market conditions identifying opportunities and maximizing asset value in any environment.

Beacon Economics led by Dr. Christopher Thornberg: Dr. Christopher Thornberg is the Founding Partner of Beacon Economics, a leading independent research and consulting firm dedicated to delivering accurate, objectively-based economic analysis. Widely known for his early prediction of the subprime mortgage crash, Dr. Thornberg is one of the nation's most respected forecasters, advising cities, counties, and Fortune 500 companies on economic trends, real estate dynamics, and policy.

For more of Dr. Thornberg's economic analysis and latest publications, please visit BeaconEcon.com.