A Happy New Year message from Peter Schiff: The value of your house is still 20% too high.

By mw | Related entries in Bad Decisions, Economic recovery, Economy, Federal Reserve, Fiscal stimulus, Housing

When an economic bubble bursts, normalcy can only return when price excesses created during the bubble are wrung out of the market. A recession is often the painful but necessary market mechanism that corrects the pricing distortion and consequent misallocation of capital that occurs in a bubble. When government intervention prevents the mispriced asset class from fully deflating, capital continues to be misallocated and economic malaise lingers on. This is the takeaway message from Peter Schiff’s Wall Street Journal editorial:

“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…

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.”

Schiff defended his thesis on CNBC:

“… if Schiff is right, homeowners are looking at pain.We know that Schiff is a tad dramatic – some would say alarmist – but his forecasts are not without merit. In late 2006, Schiff predicted the housing bubble and resulting subprime mortgage crisis and in late 2008, he predicted the automotive industry crisis and the crisis in the banking and financial market.”

Schiff’s holiday forecasts have become a regular feature on this blog. As long as his prognostications prove to be more right than wrong (as we’ve seen over the last five years) it is a tradition we will continue to observe. I do not find it particularly difficult to appreciate the wisdom in his common sense analysis. In fact, I find it much more difficult to understand how anyone could expect that a problem that was:

  • Triggered by Federal government market-distorting social engineering policies intended to permit people to buy homes they cannot afford…
  • Enabled by Federal Reserve Bank expanding the money supply and keeping interest rates artificially low to create the illusion of affordability for overpriced housing…
  • Fueled with massive deficit spending…

could be solved by:

  • More federal government market-distorting social engineering policies intended to allow people to to stay in homes they cannot afford…
  • Even more Federal Reserve Bank expansion of the money supply enabling even lower artificial interest rates perpetuating the illusion of affordability for overpriced housing and…
  • Fueling it all with even more massive deficit spending.

Definition of insanity anyone?

UPDATE: 1/4/10
Instead of insanity, how about Insana? On Friday last, Ron Insana opined specifically to refute Schiff’s thesis. Basically he is saying there is so much pent-up demand, real estate prices are so low, and the economy is improving enough that the housing market will stabilize here:



I think Insana may be right as a shorter term (1 year-ish?) call on the stock market. The economy will be feeling better after the latest massive fiscal stimulus from the tax compromise in combination with the Fed’s massive QEII monetary stimulus. I’m told heroin injections always feel good. But, to Schiff’s point, one would think that sooner or later either the needle has to come out of the arm, or you run out of heroin, or you overdose and die. It won’t feel so good then.

Cross-posted from Divided We Stand United We Fall


This entry was posted on Friday, December 31st, 2010 and is filed under Bad Decisions, Economic recovery, Economy, Federal Reserve, Fiscal stimulus, Housing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

22 Responses to “A Happy New Year message from Peter Schiff: The value of your house is still 20% too high.”

  1. Tweets that mention DONKLEPHANT: A Happy New Year message from Peter Schiff: The value of your house is still 20% too high. -- Topsy.com Says:

    [...] This post was mentioned on Twitter by Justin Gardner. Justin Gardner said: DONKLEPHANT: A Happy New Year message from Peter Schiff: The value of your house is still 20% too high. http://ow.ly/1aFHAh [...]

  2. kranky kritter Says:

    I’ve been a pretty big fan of Peter Schiff’s since the days when he predicted the housing market crash. Even read two of his books cover to cover. He’s a very smart guy, and he keeps his pulse on a number of inconvenient fundamentals of economics that lots of folks would prefer to ignore.

    Still, he’s best taken with a few healthy grains of salt. One, he’s a relentless salesman for his own idiosyncratic version of free-market true believerism. Doesn’t mean he’s wrong here, but it means he’s prone to getting carried away.

    I’m happy to agree that a big part of the problem came from governmental policies backing the idea that home ownership WAS the American dream. But I am simply not willing to let everyone else off the hook for writing very bad loans, stacking them into risky bundles, and marketing them as very safe investments. Schiff leans towards “it’s always the government’s fault,” so wise folks need to make the necessary adjustments to appreciate what wisdom he has to offer without being turned off by his simplistic boogeymanning.

    My naive take on the RE market is that beyond expecting any bounceback to be very slow, it’s hard to predict. There surely still is a high inventory of distressed properties. If all or most of those distressed properties are brought into the market in an expedited fashion, we would see prices fall markedly. That just makes sense, based on an increased supply, weak demand, and much more careful lending practices.

    But it seems that the “system” (whatever you want to call the red-tape laden process by which borrowers, banks, and government entities unwind bad loans made to unqualfied borrowers to buy overpriced properties) is going to keep creeping out the extra inventory slowly. So it’s pretty possible that the RE market stays in the current trough and doesn’t fall more.

    Then, we don’t see price growth until all or most of the shadow inventory clears the colon of the borrower-bank-government beast. If you look at the graph up top, it’s easy to see that there are many paths by which the top “bubble” line can meet the historical price trend line. Temporally, the quickest way is straight down. Which means the most pain short term. And the longer path is to keep going rightward.

    As a property owner, I don’t see much benefit in having prices drop sharply so that we can then begin to experience growth from a much lower crappier price point. It’s only the people who can profit from having RE be a growth market (banks, loan packagers, speculators. people who need a job at a bank ) that want to fast forward to a newly rising RE market.

    I don’t think those folks are going to get their wish. I think we see a stagnant market for at least 3 to 5 years, and quite possibly for the better part of a decade.

    And if we want the next growth trend in RE to be sustainable, we should all entertain the idea that home ownership is viewed best NOT as an investment, not as a dream we all must realize, but as a lifestyle decision. I have a conservative friend with a very sharp pencil who has seriously looked into home ownership from a “count everything” perspective while asking “is it financially worth it?” He says that the answer varies, and depends an awful lot on the personal details and circumstances in the individual life. He says that you can rent and invest in other things and do quite well while fashioning a lifestyle that fits you best.

    That perspective is a valuable one. We should step away from the notion that almost everyone should want to own their own home. Instead, count everything and ask whether or not it’s really for you.

  3. Trescml Says:

    Although government policy certainly played a role, it was the free market credit default swaps that took a really bad situation and turned it into a near catastrophe.

    Is it better to rip the band-aid off or to slowly take it off? Ripping it off leads to more unemployment and more people defaulting on their houses, but doing it slowly only helps if there is some mechanism which actually keeps people in there homes.

    My opinion is that we are going to see a tale of two markets where the affluent areas see small declines or actual increases and the rest of country falling 20% or more over the next couple of years.

  4. mw Says:

    I am simply not willing to let everyone else off the hook for writing very bad loans, stacking them into risky bundles, and marketing them as very safe investments. – kk

    Oh – I agree. When a bubble is inflating, greed and fraud rule the day. I’m still waiting to see the perp walks of those who sold Credit Default Swaps insurance for the Mortgage Backed Securities, but had no ability to payoff on that insurance. I just don’t get why selling insurance you cannot deliver is any less fraudulent than selling the Brooklyn Bridge.

    That said, you don’t get bubbles of this magnitude unless you have the government filling up giant troughs with money and calling the pigs to feed. We saw the greedsters and fraudsters come running when the feds filled up the “all Americans must buy a home” feeding trough and you can see them now wallowing in the slop of the brimming “all Americans must go to college” feeding trough. As bad as it is already at the “All Americans get healthcare” feeding trough – it’ll get worse. Bigger troughs attract bigger pigs.

    I think we see a stagnant market for at least 3 to 5 years, and quite possibly for the better part of a decade. – kk

    Actually that is completely consistent with what Schiff said in both the editorial and video clip. He says the next drop in home values may come in the form of a devalued currency rather than a literal drop in prices. In other words – Your $250,000 house is still worth $250,000 a few years from now, it is just that $250,000 in paper currency buys 20-30% less food, energy, building materials, gold, steel, and commodities in general.

  5. Jim S Says:

    “That said, you don’t get bubbles of this magnitude unless you have the government filling up giant troughs with money and calling the pigs to feed. ”

    BS. Utter BS. The financial systems are perfectly capable of doing it entirely on their own. Only ideological fruit cakes think otherwise.

  6. Tillyosu Says:

    BS. Utter BS. The financial systems are perfectly capable of doing it entirely on their own. Only ideological fruit cakes think otherwise.

    From the Wikipedia timeline of the crisis:

    September 7: Federal takeover of Fannie Mae and Freddie Mac, which at that point owned or guaranteed about half of the U.S.’s $12 trillion mortgage market, effectively nationalizing them. This causes panic because almost every home mortgage lender and Wall Street bank relied on them to facilitate the mortgage market and investors worldwide owned $5.2 trillion of debt securities backed by them.

    Don’t forget that the failure of Fannie and Freddie kicked off the whole crisis. And why? Because the GSEs warped the market and artificially inflated prices (as governments so often do). Their sudden absence in the market (or, more accurately, the sudden concern about their solvency) sucked demand out of the market and caused investors and financial institutions to reprice risk and reevaluate the assets that they were holding.

    Sure, Wall Street was greedy. Investors were greedy. Consumers were greedy. But I can guarantee you, none would have been so greedy if the government wasn’t warping the market. With housing prices increasing at 19% a year, driven by the GSEs with an implicit government guarantee, lenders and consumers jumped in head first. And who wouldn’t? They would have been stupid not to. Home prices were no different than a skyrocketing stock. And the government was encouraging lenders and consumers to purchase on margin.

    So yes, maybe we do need more regulation of CDOs or the interaction of financial institutions. I can see that argument. But we also need LESS government involvement in the markets in the form of the GSEs. You want to solve the financial crisis tomorrow? Reinstate the GSEs, and convince the taxpayers to provide collateral for every single one of their obligations now into perpetuity. Either that or abolish them completely. Either way it’s tough sell.

  7. mw Says:

    @Jim S
    I defer to your authority on the subject, given your first hand, deep, extensive, up close, personal and – dare I say – intimate knowledge of the “ideological fruit cake” mindset.

  8. Chris Says:

    So MW, does the divided government effect come in after the election or after the new session? Cause they seem to have gotten a shitton done after the election, and from what you’ve said before, your goal is to have nothing get done…

  9. mw Says:

    @Chris
    No I’ve never said that. That is just your cartoon characterization. I have no problem with your misrepresentations and either willful or actual ignorance of what I say, that’s just you. But you shouldn’t take what you say seriously. I know I don’t.

    I have said that I prefer no legislation to bad legislation like stimulus 1 and Obamacare. I’ve also said that true compromise can only take place when both parties have power, and that Obamacare, the first stimulus, and second stimulus just passed would have been significantly better and more fiscally responsible legislation if the Republicans actually had a seat at the table and real power in the 111th Congress.

    I expect that your question is not serious and your response will be more of your usual mindless name calling, but on the off chance you actually are interested in an answer to your question:

    The political science definition of divided government is the state that exists when one party does not control the executive branch and hold majorities in both houses of congress. My actual expectations and hopes (as opposed to your silly straw man) for divided government can be found here. The 111th Congress, including the lame duck session was a united Democratic party government by definition. It was also a perfect example of the kind of fiscal irresponsibility and insane spending that seems to accompany One Party Rule by either Party.

    Historical evidence shows that divided government restrains the growth of spending and is more fiscally responsible than one party rule. There is absolutely no doubt that this will be shown again when comparing the divided 112th to the united 111th. The 111th has made this comparison easy and inevitable since the period of the 111th Democratic One Party Rule will go down in history as the single most fiscally irresponsible episode in our nations history, including a trillion+ of new spending in Stimulus I and bailouts without being paid for, another trillion+ in new spending with Obamacare – much of it not paid for by shifting costs to the states and pretending the “Doc Fix” does not exist, and capping it all off with yet another $1trillion dollar hole in the deficit from the stimulus/tax bill just passed over the objections of the still ineffective fiscal hawks.

    The Divided 112th Congress will undoubtedly improve on that record. It just can’t get any worse.

    Happy New Year!

  10. Chris Says:

    I’d honestly rather have fiscally irresponsible spending on healthcare than fiscally irresponsible spending on killing brown people in far off lands.

  11. mw Says:

    I’d rather have neither.

  12. kranky kritter Says:

    But what about fiscally responsible spending on killing pink or green or orange people? Where does that fit in?

    What’s the relationship among the nature of the spending, killing, and the color of the folks being killed? I’m just dying to know!

    And would you rather have genital warts than fiscally irresponsible spending on killing brown people in far off lands?

  13. kranky kritter Says:

    @mw: if the rest of the “drop” in home values comes from currency devaluation, then that’s not really a drop in the real estate market per se, is it? It’s an across the board change.

    Schiff can be sort of one-note. Don’t get me wrong, it’s a note we need to hear and take seriously. It’s only that if Schiff is talking about rising commodity prices against a background of devalued currency, he’s just repeating what he has been warning about for years. It’s very like Schiff to say he’s talking about real estate, and then repeat all of his same ideas

    If it does happen, the most painful thing for those experiencing it will be the relative changes in value. Domestic products and services will become less valuable in comparison to some imported ones, and commodities will gain relative value because they have a real fixed value. One barrel of oil is worth more devalued dollars.

    It seems quite predictable that folks unfamiliar with the dynamics Schiff describes are blaming higher energy prices, for example, on unscrupulous conspiracy. But the rise in prices of energy and rare earth metals and other similar commodities is extremely predictable and expected in an environment of currency devaluation. There’s no need for the existence of a small group of wealthy amoral schemers trying to corner the market to explain things. All that’s needed is for enough folks to understand that if currencies are being devalued, holding commodities with a comparatively fixed value makes the best hedge against the currency devaluation. That’s Schiff 101.

  14. blackout Says:

    “I’m happy to agree that a big part of the problem came from governmental policies backing the idea that home ownership WAS the American dream. But I am simply not willing to let everyone else off the hook for writing very bad loans, stacking them into risky bundles, and marketing them as very safe investments. Schiff leans towards “it’s always the government’s fault,” so wise folks need to make the necessary adjustments to appreciate what wisdom he has to offer without being turned off by his simplistic boogeymanning.”

    I couldn’t have said it better, KK. Placing the entirety of blame at the feet of the Macs is a thesis which has been amply rebutted, and doing so has become the contortion of choice by which Cons try to blame Dems and Big Govt for yet another problem. Leaving aside the fact that plenty of Republicans were complicit in Fannie and Freddie thanks to an attendant loosening of regulation (aka GOP crack), any thesis which disregards the role of private lenders is incomplete, ideologically-motivated, or both. You want marginal borrowers? Check out the toxic assets on private books. I have yet to see an estimate where Fannie and Freddie are responsible for more than ~1/3 of bad mortgages. Even if those are low, there are clearly no grounds for ignoring the private players.

  15. blackout Says:

    “Obamacare…would have been significantly better and more fiscally responsible legislation if the Republicans actually had a seat at the table and real power in the 111th Congress.”

    I’m not sure how that’s anything but rank surmise. The issue was contentious enough that there was likely no room for compromise, and probably not in a direction that would necessarily have led to a “better” end product. I generally subscribe to the divided gov’t school as you know, but I believe there is always a subset of legislation that depends on one party to force it through. No doubt HCR can, and may, be improved during periods of divided gov’t, but that’s entirely difference than the circumstances required for initial passage.

  16. mw Says:

    “…if the rest of the “drop” in home values comes from currency devaluation, then that’s not really a drop in the real estate market per se, is it? It’s an across the board change.” – KK

    I’m not so sure. Dollar devaluation creates inflation, and one would expect all hard assets to increase relative to the dollar. That should include real estate in addition to commodities like copper, timber, oil, wheat, gold etc. If real estate prices remain stable in dollar terms while everything else is going up (inflating) in dollar terms, that would represent a real drop in home prices.

    I just added a video update to the post – Ron Insana offering a different rebuttal to Schiff. I think he misrepresents Schiff’s predictions, implying that Schiff had called for imminent hyper-inflation and spiking interest rates. Schiff has said all along that those predictions are not imminent but inevitable contingent on whether or not we implement correct policy – cutting spending, increasing savings, reducing the deficit, and stabilizing the currency. None of which has happened so far.

    Oh – and I firmly believe that we are killing green and orange people in a fiscally responsible manner. Not so sure about the pink ones though.

  17. mw Says:

    @blackout
    Of course I’m “surmising” that it would be better, just as you are “surmising” that the issue was so contentious no one would compromise.

    I will further surmise that “contentiousness” is not a relevant factor in whether compromise occurs on legislation. What is relevant is whether compromise is the only way a bill can get passed. Compromise never occurs unless it is the only path to passage. Why would there be compromise if it is not necessary? That does not mean real compromise has to happen when both parties have real power. It only means that it never happens when only one party holds all the cards – or thinks they do.

    I think your more cogent point is revealed in the scare quotes around “better”. Obviously, what I think would be a “better” Obamacare is vastly different than what Chris, or JimS or Justin thinks would be a “better” Obamacare.

  18. kranky kritter Says:

    I’m not so sure. Dollar devaluation creates inflation, and one would expect all hard assets to increase relative to the dollar. That should include real estate in addition to commodities like copper, timber, oil, wheat, gold etc. If real estate prices remain stable in dollar terms while everything else is going up (inflating) in dollar terms, that would represent a real drop in home prices.

    Yeah, I’m not sure either. For one, the drop is real whether it comes via direct lower prices or currency devaluation/inflation. All am trying to do is point out that there’s bit of a disconnect. Schiff’s not really talking about real estate as much as he is using it as a hook to restate his pet theses.

    When it comes to real estate values, we’re talking about two different vectors of its value. Real Estate value is impacted by real estate market conditions and by currency/inflation concerns.

    Real estate, since it gets bought with money, is subject to currency and inflation fluctuations. You are of course right that under normal conditions it could be expected to be somewhat resistant to such problems in a similar fashion to things like metals. RE is, after all, a commodity in a certain sense.

    But as we both know, the market conditions are not at all normal and real estate is a little different than a garden variety commodity.

    I guess the real takeaway, and one we probably will be able to agree upon is the notion of separate vectors affecting the direction of real estate prices.

    RE prices can fluctuate in response to issues relating to currency. I don’t disagree.

    However, my gut says that the larger issue with real estate is that there’s a lot of market disagreement about how much it’s worth. We’re post bubble, there’s substantial shadow inventory held by banks, and there is the prospect of many more defaults as resets start to kick in on the negative amortization loans which primarily occured late in the RE bubble’s lifespan.

    Granted, currency issues are likely to seriously add to the confusion as the market tries to find a stable bottom.

  19. kranky kritter Says:

    @blackout

    Yup. When it comes to the story of the collapse of financial markets when the RE bubble popped, I think it’s safest to say that there don’t really seem to be any good guys, at least not in the first 20 or 30 roles in the script.

    If it were a western, it would be all black hats. Maybe a small child in a white hat near the end, holding a muddy social security card. (now I’m cracking myself up).

    I tire quickly at conservatives who only want to complain about Fannie and Freddie, just as I tire at liberals who want to minimize their role and place all blame exclusively with the usual suspects. And who want to cast someone with 50k annual income and a $900,000 mortgage as simply an innocent victim.

    And I feel that relentless partisan bickering really gets in the way of understanding what happened and why. It’s awfully discouraging that 2 out of 3 or maybe even 5 out of 6 Americans is unable to understand the collapse outside of the context of why it was all the other side’s fault.

  20. blackout Says:

    @mw “Of course I’m “surmising” that it would be better, just as you are “surmising” that the issue was so contentious no one would compromise. ”

    I don’t believe that any objective review of recent history would weigh the basis for your surmise, which is well and truly enslaved by your chosen ideology, as equal to mine. Assuming that you’re conceding the contentiousness, as well as the complete lack of compromise from the GOP as a minority, it’s not exactly a quantum leap to propose that greater GOP numbers coupled with the well-published desire of that party to block all things Obama might well have resulted in their refusing to countenance any legislation that might be viewed as landmark and to Obama’s credit.

    In no way is that as frail a proposition as assuming (hoping? yearning?) that every piece of legislation forged in the crucible of divided gov’t will be “better”. There’s faith and then there’s idee fixe. When you lose objectivity, credibility follows.

  21. blackout Says:

    @mw “Obviously, what I think would be a “better” Obamacare is vastly different than what Chris, or JimS or Justin thinks would be a “better” Obamacare.”

    But what you’re forgetting, in what for you seems atypically polemical, is that “better” may well vary significantly between those individuals whom you’ve grouped into what I assume is a “side”. Are you so out of touch that you don’t recognize Obamacare itself as a compromise? I believe you need to review the process by which that sausage was made before speaking to compromise, or it’s alleged absence when one party holds power. I can’t think of a more apt example than the process by which HCR was crafted to disprove this: ” [Compromise] never happens when only one party holds all the cards – or thinks they do.”

  22. blackout Says:

    @KK “I tire quickly at conservatives who only want to complain about Fannie and Freddie, just as I tire at liberals who want to minimize their role and place all blame exclusively with the usual suspects. And who want to cast someone with 50k annual income and a $900,000 mortgage as simply an innocent victim.”

    You and me both. Not to mention ignoring what actually constituted the crisis. The Macs (and private lenders) certainly helped blow the bubble, but there’s no crisis without the derivatives schemes and their misleading(fraudulent?) rating by Moody’s and other stalwarts of the financial sphere.

    And yes, in our collective outrage it’s easy to forget that none of this occurs without the massive cultural “responsibility fail” that drove so many people to live so far beyond their means.

Leave a Reply


NOTE TO COMMENTERS:


You must ALWAYS fill in the two word CAPTCHA below to submit a comment. And if this is your first time commenting on Donklephant, it will be held in a moderation queue for approval. Please don't resubmit the same comment a couple times. We'll get around to moderating it soon enough.


Also, sometimes even if you've commented before, it may still get placed in a moderation queue and/or sent to the spam folder. If it's just in moderation queue, it'll be published, but it may be deleted if it lands in the spam folder. My apologies if this happens but there are some keywords that push it into the spam folder.


One last note, we will not tolerate comments that disparage people based on age, sex, handicap, race, color, sexual orientation, national origin or ancestry. We reserve the right to delete these comments and ban the people who make them from ever commenting here again.


Thanks for understanding and have a pleasurable commenting experience.


Related Posts: