'If The Government Was Completely Out Of The Housing Market, Prices Would Be Lower' Peter Schiff Says That Real Estate Is A Massive Bubble Because Of Guaranteed Mortgages

Euro Pacific Asset Management CEO and Chief Global Strategist Peter Schiff is well known for his predictions of seismic global financial events. 

In a podcast with Sachs Reality Founder Todd Sachs, Schiff spoke about the impact of government policies in artificially inflating real estate prices. He referred to his past interviews on many legacy news channels, where he spoke about the consequences of keeping "interest rates too low for too long and the moral hazards inherent with Fannie Mae and Freddie Mac."

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The Real Estate Bubble: How Low-Interest Rates Lead To Higher Real Estate Prices

Schiff opined that the real estate market is a highly inflated bubble economy. According to the financial commentator, Federal Reserve policies have artificially suppressed the cost of financing homes with low interest rates, and this policy is "subsidizing the massive property bubble." Policies encouraging the Fed to buy back government bonds and mortgage-backed securities also helped inflate real estate prices. 

Government-backed agencies like the Federal Housing Administration (FHA), Freddie Mac and Fannie Mae guaranteed mortgages and assured lenders against default risk. This also resulted in mitigating the borrowers’ credit risk to some extent and qualifying them for a lower interest rate on their mortgages. 

“Homebuyers would qualify for a larger loan than would otherwise be the case in a free market," Schiff said.  

Schiff outlined a key pattern among American property buyers. Often buyers focused on their monthly payments and their ability to keep the repayments going instead of the cost of the asset. Buyers relied on government policies and bought properties with a minimal down payment or no down payment at all. 

Lower interest rates encourage property buyers to rely heavily on long-term mortgages and buy at higher prices. Property sellers also benefit because the low-cost financing options tend to generate a higher price for their inventory.

Schiff indicated that government policies to make housing affordable are not working as expected. Instead, it is making housing more expensive and buyers end up with a bigger exposure in mortgages. He also said that if the government stays out of the housing market, the prices will be lower and affordable. Even though the financing will be at a higher interest rate, buyers "wouldn't have to borrow as much money."

Historical Context: Real Estate Markets From The 1980s To 2008 

In the podcast, Schiff discussed the American real estate market and analyzed trends across different periods. During the 1980s and '90s, the interest rates were much higher — in the 8% to 10% range, but property prices were lower. This meant less borrowing and other associated costs like insurance, taxes and maintenance. Schiff pointed out that Americans also had more savings at the time so they could make higher down payments, which reduced borrowing.

In 2008, "when the bubble popped, banks lost money on the defaults," Schiff said. Some homeowners defaulted on their mortgages for two reasons. In some cases, the mortgage values were higher than the value of their properties. For others, the teaser rate for their low-interest mortgage expired. 

"Banks were in trouble because when people were defaulting, [the banks] were getting back the collateral and the collateral had lost value," Schiff said.

He also explained that a vast majority who did not default on their mortgages created a banking crisis because there were no opportunities for price corrections on the collateral. 

Schiff suggested that the problem faced by lenders today is much bigger compared to the crisis in 2007-2008. 

"Today it’s a different story — the banks are losing money on all the mortgages, even the mortgages where the borrowers are current," he said.

He added that banks would be better off if more borrowers defaulted on their mortgages. This would allow banks to sell the collateral and set forth a price correction. 

"I think all the banks that were too big to fail, that we bailed out, are now even bigger and they’re going to fail," Schiff said. "But it’s going to be even worse for the economy because we made them so much bigger because we bailed them out the last time."

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