Peter Schiff gets it right again .. great update

[hipmatt]

How Blind can they be?
by Peter Schiff 3-29-07

As our phony economy begins to unravel before our eyes, it is amazing how few people can actually see it. The collective wisdom of stock market pundits, economists, and Federal Reserve officials gives the impression that everything is just fine. Although some acknowledge that housing is slowing down a bit, that there are isolated problems with subprime mortgages, and that inflation is not moderating as quickly as they hoped it would (let’s ignore surging oil prices), few can see any grave threats to continued economic expansion, or the bull market in stocks, bonds or real estate.

Earlier this week a CNBC anchor asked a guest if the “economic baton” might now pass from housing to the consumer, much the same way it previously passed from the stock market to housing. I’m not exactly sure where the anchor believes that consumers will now be getting the money to lead us out of the economic morass. With adjustable rate mortgages now re-setting higher, home equity disappearing, credit card debt mounting, personal savings at record lows, and the cost of basic necessities continuing to rise, the consumer is all tapped out. In fact, consumer spending is not just going to slow down; it is going to fall off the edge of a cliff.

With more traditional mortgage lending standards beginning to return, traditional home prices can not be too far off. And for those who may not have noticed, median home prices are still way above traditional levels as determined by yardsticks such as affordability and rent vs. own analysis. In many markets, normal levels may only be half of their current “appraised” values. However, due to the glut of homes that will ultimately hit the market, and the absence of qualified or willing buyers, home prices, at least in the short term, may fall well below normal levels.

Even when reporting on the subprime mess and the move to raise lending standards, most in the media still get it wrong. They seem to think the emerging “credit crunch” is a problem for home buyers as it makes qualifying for a mortgage that much more difficult. But, by preventing buyers from overpaying for homes, the credit crunch is actually a blessing in disguise. Tighter lending standards will help precipitate a crash in real estate prices. What could be better for potential home buyers than cheap houses? Sure they might have to wait a few more years until they can actually save enough money for a down payment, but since the purchase prices will be so much lower, those down payments will be easier to accumulate. More importantly, since they will be borrowing so much less money, the total cost of buying will be reduced even more substantially. The one caveat of course is that many such individuals might find themselves unemployed for a while, as the housing collapse ushers in a prolonged and severe recession. I guess you can’t have everything!

The real problems will be for existing homeowners, especially those who overpaid, who are unable to sell for their loan amounts, and who lack sufficient home equity or incomes to refinance their adjustable rate mortgages. Also feeling the pinch will be mortgage lenders, who will be unable to recoup their investments when borrowers default. Of course, the ultimate bag holders will be American taxpayers. As the crisis widens, politicians will inevitably seek to bail out everyone in danger of losing money on real estate purchased in the boom years. This will result in huge run-ups of the Federal deficit, which will be financed by inflationary monetary and fiscal policies. As a result, the biggest losses could be reserved for savers, retirees, investors, or anyone left holding dollar-denominated financial assets when the music finally stops playing.

[hipmatt]

Here is his most recent TV appearance if you want to know a bit more about Peter..
http://www.europac.net/Schiff-CNBC-3-30-07_lg.asp

[Chris Scoreboard Johnston]

Chris Johnston

Matt, he has been calling for a housing drop for 5 or 6 years. He may eventually be right, but his timing has been awful. Guys like Rich have been much more timely, even if a bit early.

[hipmatt]

Chris..
Can you really blame anyone who thought the correction was gonna start earlier? It was common sense to believe things weren’t gonna last as long as they did or get as high as they did. I sure expected things to stop long before 06/07. Who really thought that it would be common place for an average family to take out a 100% loan for $400k or more. I mean, the events that have taken place in the last 3 years have been mind blowing as far as ignoring common sense goes.

If anything I feel it is more impressive to call a correction before it happens even if it is a bit early, then to jump on the bandwagon after the obvious.

An when you say he “may eventually be right” .. sounds to me like you don’t expect a housing drop?

In any case, I appreciate him voicing valid concerns in the midst of a media that wants to pretend that everything is all good.

[Borat]

There’s an old saying, something like, “The market can stay irrational longer than you can stay solvent”. Anyway, the market was probably overvalued here in SD back in 2001, so just because they called it a few years early they were still right. No one could have predicted that people would be getting 100%+ NINJA loans. Total insanity…

[kewp]

Sigh.

I hope the powers that be are wise enough to allow this mess to correct itself, rather than try and postpone it with the dollar printing press again.

Somehow, I doubt that.

[Happy renter]

kewp
Yes, I wish the mess will be corrected by itself with price adjustment also!

Fed will be very likely to lower interest rate if the housing market crashes. However, the Fed can only lower 1/4 or 1/2 the most at a time. Also, it can only change the Fed rate during to the meeting schedule.

Hopefully, the market will crash hard and fast to correct itself. Even the Fed lowers the rate, it won’t stop the correction.

[blahblahblah]

There will be a lot of pressure on the government by both the lenders and the lendees for a bail-out. Everyone, from the dumbest FBers to the high-paid executives of mortgage companies wants to keep their winnings to themselves but transfer their losses to somebody else. “Privatize profit, publicize risk.”

[PerryChase]

“Privatize Profits, Nationalize Risks.” Interesting way of looking at things. That’s exactly what’s been happening during the Bush years.

[kewp]

I don’t think there is enough money available to finance any meaningful sort of bail-out. Even with borrowing from China and running the printing presses full time.

Re: interest rates

I assume this will be a good thing for potential future homeowners. Assuming they are making money and have good credit, low interest rates plus a burst housing bubble is a winning combination.

The trillion dollar question, though, is how dependent our economy is on the RE bubble.

[Anonymous]

Ain’t gonna happen; this mess is going to be too large, when combined with Social Stupidity and MediWelfare.

Yep, the wimpy politicians will try to foist this upon the citizenry, but there’s only so much room on the cart, and there ain’t enough room for all of the dead bodies that will come about from the upcoming housing/mortgage collapse.

[citydweller]

Borat,

What are NINJA loans?

[Borat]

NINJA stands for “No Income, No Job or Assets”. It’s mortage biz talk. And yes, they really give those loans out, or at least they used to when the bubble was in full swing. AKA “liar loans” or “toxic waste”

[(former)FormerSanDiegan]

I think Chris J’s point is that this guy will eventually be correct, but doesn’t really deserve credit since he made the call before the most recent doubling in prices.

Reminds me of Alan Greenspan’s famous quip “irrational exubberance” uttered sometime in 1996. He may have eventually been correct. But guess what ? Prices never dropped back down to the level they were at the point he made that speech.

[DaCounselor]

“Can you really blame anyone who thought the correction was gonna start earlier?”
____________________________

It’s not about blame – it’s about the timing of the call. If, as Chris suggests, this guy was calling for a end to the RE run-up in the early 00’s and someone who was ready, willing and able to buy sat out because they believed in this guy’s call….oh boy. They missed out on what may end up being a once in a lifetime explosion in value. Following this guy’s call cost them hundreds of thousands of dollars. What a disaster. Timing is not everything, but it’s damn important. Being off by 5-6 yrs and hundreds of thousands of dollars is a major, major error no matter how you slice it.

[Author]

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