Earlier this week, I chatted with Peter Schiff, the president of Euro Pacific Capital. Schiff, a notorious bear, argued that the government's response to the housing crisis has only made matters worse and that the best way to help the market would be to let home prices fall further. Some excerpts from the interview:
What's your take of the Fed's moves to engineer lower mortgage rates?
It is a bad thing. They are trying to maintain high home prices by keeping interest rates low. That's how they want to create more affordable housing. What's a much more efficient way [to create more affordable housing] is to let home prices fall so that houses become more affordable because they are cheaper. And so people don't have to borrow as much money to buy a house. These low interest rates are only temporary. They can't stay down here. [See our recent interview with Nouriel Roubini here.]
What should the government do about the foreclosure epidemic?
We should allow the foreclosure process to go through. We should allow lenders to foreclose if that's their choice. We should allow them to work out deals with the tenants if that's what the parties agree to. In many cases, foreclosure is a good thing because it takes somebody out of a property that they couldn't afford and puts it into the hands of somebody who can afford it. There can be somebody who is living in a house that bought it with nothing down—they are not going to make the payments, so why even modify the loan? They don't have any equity. When people own houses without any of their own money at stake, they don't maintain them. It would be better for the bank to foreclose and sell the property to somebody who actually has money, somebody who is a viable homeowner and not some speculator. So, what would you advise policy makers to do?
They should do nothing. They've done enough damage. Why don't they just let the market work? Why can't we just let housing prices go down? In California, housing prices got to like five or 10 times median household incomes—it was insane. Even though prices have dropped 20 percent, housing is still ridiculously priced. Prices need to come down. It's interesting: Initially, Fannie and Freddie's mission was to help houses be affordable. Now, their mission is to keep housing prices expensive. They are trying to prop up prices and not let them come down. That's the kind of stuff that the government did in the Great Depression. The government tried to stop food prices from coming down; they were destroying cattle and plowing under fields because they didn't want food prices to go down. In bad economic times, they were trying to maintain high food prices so that people who are unemployed have to spend more money to eat. So, now they are trying to maintain high home prices. It's stupid. Why not let home prices fall so that people can buy houses cheaper? By how much do you think home prices are going to fall this year?
They are not going to fall as much as they should because the government is attempting to artificially prop them up. But the problem is, the more they do that, the greater the oversupply, because they are enabling more home building. We shouldn't be building homes right now. But because the government is artificially subsidizing the home building industry and home prices, more supply is being added to a saturated market. But haven't we seen housing starts decline precipitously?
Yeah, but they shouldn't be starting any [new homes]—there is such a glut on the market. The number of unoccupied homes on the market is at an all-time record high. So, you have all these homes that nobody is living in, why would you be building new ones? That's not one of the problems we have in this country: a lack of housing. There are other things we lack, like factories to make stuff. But the government is trying to artificially prop up houses because as housing prices fall it exposes the extent of the damage in all these lending institutions that hold all these mortgages. And they are trying to maintain the illusion of home equity to the American public so they will spend more and save less, which ultimately undermines our economy. But in the short run it [triggers] more spending than would normally be the case.