On Tuesday, MarketWatch ran a somewhat alarming headline: "U.S. wealth has shifted to stocks from homes. There are big reasons to worry." Those reasons soon became clear.
Stocks now make up 30% of all U.S. households' assets, while homeownership accounts for only 25%. Around 2005, that picture looked very different: Real estate assets made up more than 30% of household wealth, while stocks accounted for around 15%.
What's so worrying about that turnaround, which began last year and has grown since? "The A.I. boom is far larger than the boom in subprime mortgages that set off the 2008 crisis," noted The New York Times last month. "A.I.-related spending accounts for about half the growth in the U.S. gross domestic product, by some estimates. A vast majority of the $33 trillion in market value the S&P 500 has gained since late 2022 has come from spending linked to A.I. companies."
So, the four-year bull market that created this explosion in stock market investments is disproportionately based on an AI boom. Or, as some believe, an AI bubble.
Dangers of an AI Bubble
If it is indeed a bubble, then the consequences when it bursts would likely be catastrophic. On Tuesday, we quoted Deloitte's U.S. Economic Forecast: Q3 2026. Deloitte included the bursting of an AI bubble among a number of possible scenarios:
"In this scenario, we assume an equity-market correction of 35% ... Real GDP grows by just 0.2% in 2027 before contracting by 1.2% in 2028," says Deloitte. "As the recession begins to take hold, we assume the US Federal Reserve embarks on a series of interest rate cuts. This helps stabilize the economy and equity markets. However, the subsequent recovery is assumed to be much slower than after previous downturns."
To be clear, the equity market is the stock market, and a "correction of 35%" means a 35% decline in stock prices. Such a correction would have been painful even when relatively few Americans were invested in the market. Now that it accounts for 30% of all household assets, the impact would likely be severe.
And it might hit Gen Zers especially hard. "As homeownership becomes a fleeting concept for younger generations as home costs continue skyrocketing roughly 50% in recent years, young adults are treating their down payments as the new starter asset as they amass a record-high $3.1 trillion in holdings, up 4.5 times since the pandemic alone," reported Yahoo! Finance in June.
Why Do Some Market Experts Believe AI Will Be a Bubble that Bursts?
Who might know better the answer to that question than ChatGPT? So, we asked it.
"The argument that AI is a financial bubble waiting to burst rests on a distinction that is easy to overlook: a technology can transform the world and still be a terrible investment at the prices people pay for it," it responded [its italics].
"Many market sceptics do not believe artificial intelligence is a fad," continued ChatGPT. "They believe investors may be dramatically overestimating how quickly it will generate profits, how much companies will ultimately earn from it, and how many of today's AI businesses will survive."
Just as with previous technological innovations (railroads, TV, the internet, and so on), some companies that seem likely to succeed will fail, leaving investors with losses.
And many are concerned about foreign competition. Even if the United States "wins" the AI race, might China, for example, piggyback on its success, coming in with much less costly AI products that squeeze out American ones?
Nobody can be sure of the answers to that and many other questions. But a huge part of the future wealth and prosperity of U.S. consumers hangs on these unknowns.
Housing Markets Aren't Perfect Investments
Let's not pretend that housing markets, like stock markets, don't have occasional corrections. But the biggest we've seen since records began was around 22% and lasted two years (March 2007-March 2009).
Readers who glance at the Federal Reserve Bank of St. Louis's chart of average sales prices of houses sold will see that corrections in housing markets tend to be minor, brief, and clustered around recessions. The 2007-09 one was a wild outlier, and all the others since 1960 have been small blips.
Meanwhile, it's hard to imagine a housing market bubble. Homes are about as far from an unproven technology as things get. And people who buy homes aren't wagering on an unknown outcome. They're principally buying shelter, the demand for which is highly unlikely to suddenly evaporate.
Of course, some local housing markets are vulnerable to changing economic conditions. Places like Detroit suffered greatly when vehicle manufacturers automated many processes and exported many jobs. And the entire Rust Belt saw similar stories.
But unlike stock markets, local housing markets don't tend to collapse in hours, days, or weeks. Outside of nationwide downturns, it typically takes years for local home prices to fall far, giving homeowners plenty of opportunities to shift their investments to areas that are still thriving.
"This is AI versus housing," Mark Zandi, chief economist at Moody’s Analytics, told MarketWatch. "They are bookends of the economy, and AI is leading the way, but housing is struggling to keep up."
On the day this was written, Oct. 15, The Barron's Daily e-newsletter opened: "The artificial-intelligence trade is under serious pressure. Concerns about AI debt are spooking investors."
Let's hope we're not worrying too late.
