Peter Schiff: Weak Economy Is Driving Strong Housing Market
New home sales blew away expectations in July, coming in at the highest level since 2006. A lot of people take this as a sign of a strengthening economy. Peter Schiff begs to differ. In his podcast, he argued that surging homes sales are actually a sign of a weak economy.
Single-family new home sales rose 14% between June and July to an annual rate of 901,000, according to Commerce Department data. Sales were up 36% on a yearly basis.
This comes on the heels of a 24.7% spike in existing home sales, according to National Realtors Association data that came out last week.
As Peter pointed out in his podcast, you have to go back to housing bubble days to find a bigger month for new home sales. Is this because the economy is booming right now?
No. It’s got nothing to do with a booming economy. In fact, one of the reasons so many new homes are being bought is because the economy is so weak that mortgage rates are down at two-and-a-half percent.”
There is also a dark side in the housing market that is not being discussed. Even as people buy houses, many more are in danger of losing theirs. The overall delinquency rate for mortgages on one-to-four-unit residential properties spiked by nearly 4% in Q2, reaching 8.22% as of June 30, according to the Mortgage Bankers Association’s National Delinquency Survey. The jump in the delinquency rate was the biggest quarterly rise in the history of the survey.
Wolf Street summed up the situation.
This mess playing out in the mortgage market has been largely swept under the rug of widespread, government-supported forbearance programs – to where no one really knows what will happen to those mortgages when these forbearance programs end. And the exuberance in other parts of the real estate industry, such as with homebuilders, and even with mortgage brokers and mortgage lenders that arrange refi and purchase mortgages, is a contradiction to what is going on with these swept-under-rug delinquencies that will eventually come to a head.”
That contradiction is being fueled by Federal Reserve monetary policy. In effect, lenders are giving away money to buy homes. Keep in mind, you can still deduct mortgage interest from your income taxes. That means for those who itemize deductions, the net after-tax cost of the money will fall below 2%.
That is below even the Fed’s official inflation rate. Now, the actual inflation rate is well north of that. But here, you could borrow money to buy a house for less than the annual inflation rate that we have now. … So, this is a great trade.”
Peter said the real loser in all of this will be the lenders – the banks. The government can guarantee mortgages so they will get paid. But the government can’t guarantee that the dollars used to repay that mortgage will have any real value.
So, what does this mean? If we’re going to load up American banks with 30-year mortgages at 2.5%, what happens when interest rates go up?
We are setting up our financial system for a complete implosion. The banks are going to fail. Anybody that owns these mortgages — pension plans, endowments — this is going to be a complete disaster. Yes, it’s a windfall for the debtor, but it’s a disaster for the creditor. And a lot of Americans are creditors that don’t even know it. But our whole financial system is going to implode like a house of cards because of these low mortgages.”
Not only is the government guaranteeing mortgages, so is the Federal Reserve. The central bank is guaranteeing that you pay an insane, artificially low interest rate. So, even though home prices are rising to record levels and the cost of building new homes is rising as well, it doesn’t matter so much when you can borrow at 2.5%.
And it’s only because the economy is lousy that you can get a mortgage this cheap, which is the only reason people are able to buy.”
Low mortgage rates are allowing people to buy homes, but that doesn’t explain why so many people are buying homes. Peter goes on to talk about that, saying they are moving out of the cities and high-tax states.
In this podcast, Peter also breaks down some more data revealing the economy isn’t rushing toward recovery and talked about the Fed’s Jackson Hole symposium.