Peter Schiff: Home Prices Are Still Too High

Schiff has an op-ed in the WSJ today here:

Home Prices Are Still Too High

in which he says

Even those economists worried about renewed price dips would be unlikely to believe that the vicious contractions of 2007 and 2008 (where prices fell about 30% nationally in just two years) could return. But they underestimate how distorted the market had become and how little it has since normalized.

By all accounts, the home price boom that began in January 1998, when the previous 1989 peak was finally surpassed, and topped out in June 2006 was extraordinary. The 173% gain in the Case-Shiller 10-City Index (the only monthly data metric that predates the year 2000) in those nine years averaged an eye-popping 19.2% per year. As we know now, those gains had very little to do with market fundamentals, and everything to do with distortionary government policies that mandated loans to marginal borrowers, and set off a national mania for real-estate wealth and a torrent of temporarily easy credit.

Schiff foresees a 20%-30% further decline in home prices.

From my perspective, homes are still overvalued not just because of these long-term price trends, but from a sober analysis of the current economy. The country is overly indebted, savings-depleted and underemployed. Without government guarantees no private lenders would be active in the mortgage market, and without ridiculously low interest rates from the Federal Reserve any available credit would cost home buyers much more. These are not conditions that inspire confidence for a recovery in prices.

In trying to maintain artificial prices, government policies are keeping new buyers from entering the market, exposing taxpayers to untold trillions in liabilities and delaying a real recovery. We should recognize this reality and not pin our hopes on a return to price normalcy that never was that normal to begin with.

What I’d like to understand, given how obvious all Schiff’s points are, is how is it even possible for the government to “prop up” housing prices any more? I think it is because many home buyers don’t care much about reselling, they plan to stay in the house and pay off the mortgage and they can afford the payments because of the low rates. But anyone who gets anything other than a fixed-rate level pay mortgage is an idiot in this market, because a floating-rate mortgage or a balloon mortgage will become unpayable in a few years.

This explanation doesn’t work for the commercial real estate market, so I predict it will collapse first.

I still get bombarded with mail solicitiations to refinance or to borrow money against my house, though I only get a couple of these a week while at the height of the bubble a few years ago there would be 1 or 2 every day. I’ve already got a HELOC for as much as I could conceivably want to borrow, which is a lot less than the value of my house (even after applying Schiff’s 30% correction). But the machine that inflated the bubble is still operating.


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16 Responses to Peter Schiff: Home Prices Are Still Too High

  1. I think the correction will be bigger than another 20-30% in a lot of places. I hardly see how Americans will buy a house in any way besides out of pocket for quite a while. The country has no savings and the foreign money will come into factory building to employ Americans in sweatshops. That’s if at all considering your regulations and taxes. And not only this, but US real estate won’t be that desirable to begin with because a lot of people preferred America over other places due to the subsidy that Americans benefit from the rest of the world, for one, and secondly, nobody will want to live in crime ridden cities and all that. So the only real estate, the best one, in coastal peaceful areas will be snatched by foreigners and the rest will be crap.

    Anyway, to answer your question. If I can borrow money from the Fed at 0% and lend it to an American, why shouldn’t I? If the assumption that rates won’t go up(and the Fed will probably not raise them) is correct, then I’m making money on the spread.

    Also, due to the bailouts and all that, banks can pretend to be liquid right now and don’t have to foreclose and sell all the homes behind their bad mortgages.

    What I don’t get is why not borrow until you reach the value for which your house is appraised and then tell the bank to either take the house or take a cut on their principal when the market will experience another correction.

  2. Polymath says:

    RV, first of all I couldn’t get the same terms now as in 2008, and second even if I could and I did that it would involve being evicted and the costs of moving and having a bad credit rating for 7 years, and that’s assuming I would be off the hook legally if I gave them the house back which is not true in all states.

    I might still do it, not intending to cheat, but because I wanted to fund a startup or something, if someone could give me a brilliant enough idea for one.

  3. Alvis Velthomer says:

    On the subject of China I find it hilarious how “atheist communist” China does capitalism better than America and is more fervent in fighting for traditionalism than “Christian-nation” America.

    Just check this article:

    Could you imagine a Western country shutting down a single pornography website (let alone 60K) without a massive outcry?

    It is pitiful. What the hell are today’s conservatives just trying to conserve anyway? “Liberty”? “Freedom”? The more I look at the “conservatives” the more I see them as “slow-go” regressives.

  4. Polymath, why the heck would the bank evict you considering that you could tell them to take a 20% loss instead of 30%? You can make a hyperinflation survival pack with bullets, food and precious metals. 😛 Salon massages for Chinese men?

    Alvis, the thing is that the Chinese government probably cares more about the Chinese people than the American one. I mean, sure, they probably see their citizens as mere subjects who should do as they are told, but the US officials literally hate their constituents. And this is another thing – when you’re not founded on ideas like freedom and whatnot, you can do what’s best for your citizen body. I doubt that the founding fathers envisioned internet porn. I don’t really mind porn, but not having it everywhere does make it easier for people to raise kids(not that Westerners care about it, it’s all about the most sex we can get).

  5. Workshy Joe says:

    With a central bank running the economy, the only absolute certainty is economic chaos.

    But Schiff’s prediction of a 20-30% price decline in the near future seems likely.

    Although it is theoretically possible to re-inflate the housing bubble, I wonder what mechanism would be used to do that and what havoc that intervention would cause.

    Although the last round of Quantitative Easing increased the size of the Fed’s balance sheet, there is no guarantee that cash rich investors will automatically sink that cash into houses or commercial property.

    Ultimately, someone has to carry the can, live in the house/run the business and pay the rent/mortgage. That’s where it all comes unstuck!

  6. Joe, I think that house prices will go down by at least 50% in real prices. They can even go up in nominal prices, but what good does it do to you that your house is worth a million if it costs you ten grand to fill your refrigerator?

    And only an idiot would invest in real estate. This sector won’t be invested in in America for the next two decades. Smart people put their money in commodities, dividend paying foreign stocks, resource companies, companies that sell to China or non-American non-leveraged consumers and so on.

  7. Workshy Joe says:


    Absolutely. Even a few years ago, at the height of the UK housing boom, I was wary of getting a mortgage.

    I just looked at inflation of salaries vs inflation of house prices and saw that the whole thing relied on ever-increasing ammounts of leverage.

    My savings are in physical gold and silver.

  8. rebelliousvanilla says:

    Joe, why are you people so afraid of debt? I wish I owned a house so that I could leverage it to the hilt and have my debt wiped out by inflation. If you can, get the biggest 30 years fixed rate mortgage on your house. And since just buying gold with the money is risky, you can invest it in stocks that pay dividends higher than your interest and hence stay current on the mortgage and if inflation will be really bad, you will be able to pay the whole mortgage back with an year’s dividends.

  9. Polymath says:

    RV, I think Workshy Joe is not afraid of getting a mortgage on an existing house, he’s worried about borrowing to buy a house. I plan to borrow quite a lot on my HELOC when I figure out where to put it. Besides precious metals, I need US stocks with reliable dividends or high book value, or foreign stocks in strong currencies. Ideally I should just get the best bargains and then hedge against various market and currency risks with options, but I don’t have the time to do that kind of research. I also need something pretty liquid because if interest rates spike I will only have a month or less to sell and put the money back. (A combination of a stock crash followed by interest rate spike would kill me so I’d hedge against a crash with options.)

  10. rebelliousvanilla says:

    Polymath, this is why you need a broker. Too bad I don’t work as one yet. 😛

    Anyway, don’t get US stocks. I don’t get why anybody would invest in the US. The only companies who deserve being bought are resource companies and exporters, even if all companies in the US have horrible P/Es. I’d invest in oil in the US, but the political risk is monumental in America. America is the only country where I constantly hear people ramble about how there should be windfall profit taxes on oil companies.

    I don’t understand the need to hedge against currency differences. You think the dollar would appreciate against other currencies in a repeat of 2008? Your big problem is that you can’t borrow at a fixed rate. Can’t you lock in your rate?

  11. Polymath says:

    I would be hedging against the dollar crashing relative to other currencies if I held US stocks. My actual mortgage is at a fixed rate and has another 3 1/2 years to go. The HELOC is basically the Prime rate minus 1%, so right now I can borrow at 2.25% but it resets every month. It’s worth borrowing at that rate even though you’re not supposed to borrow to invest, but figuring out how to hedge against the risks is tricky, you have to protect yourself on the downside if you are borrowing to invest.

  12. rebelliousvanilla says:

    Polymath, can’t you lock in the rates on what you’d borrow? Because if you do, the bank is assuming the interest rate risk and you can invest in things with higher yields than their rate.

  13. Polymath says:

    I can’t change the line of credit to a fixed rate, I can’t get the same terms any more.

    Happy New Year, btw.

  14. Workshy Joe says:


    That’s correct. I’ve never had a mortgage. Still renting. Even Peter Schiff is a renter these days. That’s how crazy the housing market is!

  15. rebelliousvanilla says:

    Joe, if you’re still renting, then it’s pointless to get a mortgage since the only reason why I want a house is for a HELOC. And Schiff owns a house, it’s just that houses aren’t investments for sane people. They are expenses. He owns cars and a boat too.

  16. Workshy Joe says:


    Sure. He’s not broke by any means. He just doesn’t own the house where he lives.

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