Peter Schiff, CEO and chief global strategist at Euro Pacific Asset Management, is well known for predicting seismic global financial events.
Schiff spoke on a podcast with Todd Sachs, founder of Sachs Reality, about the effects of government policies that artificially inflate real estate prices. He cited past interviews with a number of traditional news channels in which he talked about the impact of “keeping interest rates low for too long and the moral hazard inherent in Fannie Mae and Freddie Mac.”
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Schiff said the real estate market is a highly inflated bubble economy. The financial commentator said the Federal Reserve’s policies have artificially suppressed the cost of mortgages through low interest rates, which are “subsidizing a massive real estate bubble.” Policies encouraging the Federal Reserve to buy back government bonds and mortgage-backed securities also contributed to the soaring real estate prices.
Government-backed institutions such as the Federal Housing Administration (FHA), Freddie Mac, and Fannie Mae guaranteed mortgages and guaranteed default risk to lenders. This has reduced the credit risk of borrowers to some extent and allowed mortgage interest rates to be lowered.
“Homebuyers will be eligible for larger loans than they would have been in a free market,” Schiff said.
Mr. Schiff outlined the main patterns of American real estate buyers. In many cases, buyers were focused on the ability to continue making monthly payments and repayments, rather than the cost of the property. Buyers relied on government policies to purchase properties with minimal or no down payments.
Lower interest rates encourage property buyers to rely more heavily on long-term mortgages and purchase at higher prices. It also benefits real estate sellers, as lower-cost financing options tend to drive higher prices for inventory.
Schiff said government policies to make housing more affordable are not working as expected. In fact, home prices are soaring, and buyers are finding themselves taking on more mortgages. He also said that if the government withdraws from the housing market, prices will become lower and more affordable. Although loan interest rates will be higher, buyers “don’t need to borrow as much money.”
Historical background: real estate market from 1980s to 2008
During the podcast, Mr. Schiff discussed the American real estate market and analyzed trends over different time periods. From the 1980s to the 1990s, interest rates were much higher, ranging from 8% to 10%, but real estate prices were low. This means lower borrowings and associated costs such as insurance, taxes and maintenance. Schiff noted that Americans at the time also had more savings, which allowed them to make larger down payments, which led to less borrowing.
In 2008, “when the bubble burst, banks defaulted and lost money,” Schiff said. Some homeowners default on their mortgages for two reasons. In some cases, the value of the mortgage was greater than the value of the property. For some, teaser rates on low-interest mortgages have expired.
“Banks got into trouble when people defaulted on their loans. [the banks] “When we were getting the collateral back, the collateral had lost value,” Schiff said.
He also explained that the majority of people who did not default on their mortgages did not have the opportunity to reprice their collateral, causing the banking crisis.
Schiff suggested that the challenges facing lenders today are much greater than during the 2007-2008 crisis.
“Today, it’s a different story. Banks are losing money on all mortgages, including those that the borrower currently has,” he said.
He added that banks will do better if more borrowers default on their mortgages. This allows banks to sell collateral and reprice it.
“All the banks that were too big to fail and that we bailed out are now even bigger and will eventually fail,” Schiff said. “But the economy is going to get worse because we expanded the size of the economy so much because of the last bailout.”
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The article “If the government completely exited the housing market, prices would be much lower” Peter Schiff says real estate is a huge bubble because of guaranteed mortgages originally appeared on Benzinga.com
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