Schiff: Look Out Below! Home Prices to Fall Additional 20%
Schiff notes that some economists anticipate a further correction, but most don't believe that the vicious correction of 2007 and 2008 could return. To counter, Schiff notes that many underestimate how distorted the market had become.
From the start of 1998 through the middle of 2006, arguably at the peak of the market, the Case-Shiller 10-City Index rose an astounding 173% at 19.2% per year. Schiff notes that we now know that the gains had little to do with fundamentals and more 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."
One of the co-founders of the Case-Shiller index, Robert Shiller, contends that home prices, from 1900 - 2000, followed a more muted 3.35% average growth rate, which included the Great Depression, post-war eras, and the boom of the 90's.
So, Schiff notes that in 1998, the Case-Shiller index was at 82.7. Following the 3.35% average annual price increase predicted by Shiller lands us at a point of 126.7 in October 2010. However, the Case-Shiller Index came in at 159.0, suggesting an additional 20.3% decline in the index to get it back to more normalized levels.
Schiff continues that no one is making a case that fundamentals have gained traction, and most point to government intervention as an artificial stop to the free fall. Programs like "the home buyer's tax credit, record low interest rates, government mortgage-assistance programs, and the increased presence of Fannie Mae, Freddie Mac and the Federal Housing Administration in the mortgage-buying business" have put the kibosh on falling prices for now.
But, contends Schiff, with "bloated inventories, 9.8% unemployment, a dysfunctional mortgage industry and shattered illusions of real-estate riches, does it makes sense that prices should simply fall back to the trend line?" He argues that they would overshoot to the downside.
So what's the outcome? A major market correction in the next year.
Schiff thinks not, rather that there may be potential for an additional 10% dip below the 100-year trendline in the next five years, espically is mortgage rates continue to more historical rates of 6%. He notes that that would put the index at 114.02, or about 28.3% below where were at now. Even a 5% dip would put the index at 120.36, about 24.3% below current levels.
Concluding, Schiff comments that, "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."
ETFs to watch on the outlook include:
- iShares Dow Jones US Home Construction (NYSE: ITB);
- SPDR S&P Homebuilders (NYSE: XHB);
- ProShares UltraShort Real Estate (NYSE: SRS);
- iShares Dow Jones US Real Estate (NYSE: IYR).
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Standard & Poor's, Life, Style and Real Estate, Peter SchiffComments View All Comments
Short Schiffed
I would like to thank Peter for exposing the incompetence of most of these comments, not to mention his own distorted recollection of what got us here. So po' folks forced you real estate tycoons into the death spin of the last few years. That's priceless. No wonder we're in this shape.
Love Peter but Reason Is Wrong
I believe that Peter is correct on the direction of the market, but wrong on the cause of the bubble. Wall Street's securitized lending demolished lending standards. Any loan that could be originated could be sold as Triple A paper for huge profits. Trillions were pumped into a market that didn't need additional stimulus causing a huge bubble. It is the speculators in the second home markets (Florida, Arizona, Nevada) that represent 50% of the foreclosures. These aren't unqualified, low income borrowers. All markets were distorted by Wall Street's sub-prime lending, but these markets were by far the worst! As a thirty year veteran of the real estate development business I saw this coming and predicted the crash.
2011 Home Prices
I'm a broker in California and my buyers are fence sitting for a 20% price reduction in 2011.
Rates
Schiff is right Bernanke has to go!
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price bs
John on Dec 31, 2010 12:49 AMMark as Spam
I want to add here that all this Macro talk , IE 28.3 percent down, Makes very little sense. The Banks lent very large sums on individual houses ,, millions,, to people that would never be able to afford a million dollar home. 2 million at 6 1/2 percent ($20000 a month) after all the local taxes ,and stuff onthe home, Really. 240,000 a year ? If you live in one of those areas look around , if all your friends make a million a year -- OK -- if not you are about to lose it. If your home is $250,000 and its a nice area , I don't think it will lose another $80,000 - OH real estate is going down But it will be the hot spots that will get killed Miami Beach was just the start. PS I'm still a fan Peter but this is going to effect banks and people that thought they had money.