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