By Economist Peter Schiff                                                                                     

In holding overnight rates steady at 2% this week, the Fed once again put forth its belief that despite a cascade of horrific financial data, the economy was likely to continue to grow slowly and that inflation would moderate. Although wrong on both counts, this view is consistent with the relative optimism that prevails across the country. After nearly two decades of an uninterrupted consumption binge, most Americans simply refuse to believe that anything can seriously derail the American economy. It's a pleasant dream, but the wakeup call can't be too far off.

The benign outlook on inflation is rooted in the hope that a slowing economy will pop the commodities "bubble" and break the back of inflation. Despite these pronouncements, most rational observers understand that inflationary pressures are currently intensifying, not abating. Rising commodity prices are not the source of inflation, but merely the symptom of rampant monetary expansion from the Fed and other central bankers around the world. By all indications, the liquidity injections are about to shift into a higher gear. The recent housing bailout bill is the most inflationary legislation ever enacted and there is already talk of yet another economic "stimulus" bill. The new money creation needed to finance these schemes, together with exploding federal budget deficits, will not only reverse the recent declines in commodity prices, but send other consumer prices soaring as well.

It is also worth noting that a slowing economy does not, by itself, bring prices down. If it did prices in Zimbabwe would be falling. When combined with responsible monetary policy, a growing economy would tend to push prices lower (based on greater productivity and expanded supply).

As far as the economy avoiding a recession, the chances of that are fairly close to nil. In fact, if the government reported legitimate GDP numbers, the recession that is already being felt on a gut level would finally be officially recognized.

One reason for the apparent optimism on the economy is the belief that the housing market is nearing a bottom. Every step down the housing abyss seems to convince more and more people that the bottom is in. Last week's Case/Shiller Home Price report, which showed that real estate prices have now returned to 2004 levels, is the latest piece of such "good" news. In fact in a new national survey by real estate website Zillow found that 62 percent of U.S. homeowners believe that their home is worth as much or more than it was a year ago. Three-quarters of those surveyed expected that the value of their homes would rise or at least stay the same between now and early 2009. Talk about a field of dreams!

However, given the horrific fundamentals of the market, I would expect that before the market finds a real bottom, another four years of price increases will be similarly erased; leaving prices at 2000 levels or lower. Although this prognosis may seem dire, it is nonetheless reasonable when you consider the current supply/demand dynamics.

Despite the sentimental hope that homes are worth what they cost to build, or what the last buyer paid, in reality they are determined simply by supply and demand. In this case the supply of homes on the market, and the number and motivation of potential home buyers.

First supply: In 2008 there are more vacant and "for sale" homes on the market than there have ever been. In the last few years, despite signs of a coming real estate bust, the nation's largest home builders kept building. As a result, hundreds of thousands of unwanted homes were added to the market. These homes, combined with the existing homes that underwater mortgage holders are desperate to sell, add up to unprecedented supply. Inventory at the current sales pace is approaching one year.

The demand side is even worse. In real estate, a buyer's expectations for future price gains and their ability to obtain a mortgage (with as little money down as possible) largely determines demand. It is telling that the price increase optimism of current home owners does not extend to current home buyers. Also, with lending standards finally being tightened, buyers do not have access to the cash to bid up prices. Many are taking advantage of a still attractive rental market to sit on the sidelines.

These dynamics are actually much worse than what were in place in the summer of 2000 when the home price boom was still in its opening innings. All of the factors that were in place to push home prices up to unsustainable levels (unlimited lending, massive speculation, widespread belief in the indestructibility of home prices) are all gone. Prices will continue to fall until all the gains sparked by these forces have been erased.

The reckless optimism displayed by the Fed and current homeowners has proven extremely resilient. But sooner or later reality must intrude. Once the wake up call sounds, the economic effects will be severe. Once homeowners realize that their equity is gone, and not likely to return, what incentive will many have to continue making burdensome mortgage payments? With a new wave of option ARMs about to reset, this Christmas it will be the mail, not the bells, that will be doing most of the jingling.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book "Crash Proof: How to Profit from the Coming Economic Collapse."
 

 

 

August 9, 2008: Richard Lambros CEO of Builders Industry Association Of Southern California 

Bruce Norris is joined this week by CEO of the Builders Industry Association of Southern California and panelist for I Survived Real Estate 2008, Richard Lambros. Richard and Bruce discuss the current market, when the slow down was anticipated, how much worse it's been than expected, percentage off in building permits in Southern California, how this downturn differs from the past downturns, the speed of deceleration, the leading factors causing the problem, the credit market getting tight really causing problems, light at the end of the tunnel, HR3221 and how it will change and help the market, stabilizing credit markets, helping the foreclosure issue, how HR3221 will help builders directly, FHA and the new loan limits, why it's so important that limits have changed, median home prices, supply shortage of housing, homeownership levels and how California compares to other states, affordability, misconceptions that builders make huge returns on projects, cities adding fees during a boom, cities focusing on product that produce taxes and creating fees for product that does not, how some cities are actually helping by differing fees in this down market, if a big budget deficit is a concern for the building industry, some cities actually putting together incentive packages to stimulate building but a deficit causing a decline, Prop 13 and concerns, the Builders Industry Association and legislation and how the BIA is involved, how builders are highly regulated, green building and zero net energy homes, the BIA's stance on green, how California already builds some of the most energy efficient homes in the nation, construction loans in the current market and lenders willingness to lend for building, land prices in the current market, how builders took bad outlooks in a booming market, the statistics builders watch that will suggest a comeback, biasc.org. 

 

 

 

 

(Sep 18, 2007)- "If the dollar loses value too quickly, it could wreak havoc on the economy and financial markets - driving up interest rates and inflation and slashing Americans' purchasing power" -Peter Schiff 

 

(Sep 19, 2007)- "People keep talking about Fed bailouts as if there is no cost. All the Fed can do is create new dollars. What that does is diminish the value of all the dollars everybody already has. They try to socialize the losses among all the holders of dollars" -Peter Schiff

 

Aug 4 -  Academic economists have long grumbled about the unreliability of official inflation data, but the belief that things are worse than governments are willing to admit is trickling down from the ivory tower. Even Charles Bean, the new deputy governor of the Bank of England, has publicly criticized central bankers' use of "core inflation" data, which disregards food and energy prices, in setting policy. When "non-core" items like gas and cereal rise so much that consumers have little cash to spend on anything but those essentials, it's hard to ignore. The temptation to fudge numbers is one that bureaucrats worldwide find hard to resist. In Argentina, where government reassurances about single-digit inflation have long seemed unconnected to consumer reality, revamping the government statistics office became an issue in the last national election. In China, where data based on the prices for state-provided goods and services are increasingly irrelevant in a privatizing economy, the stats are so out of whack that Goldman Sachs has resorted to a movie-review-style system to rank the quality of official data on a scale from one to five. But the habit of playing fast and loose with numbers isn't native to the developing countries where high inflation reigns. Indeed, the popular "core inflation" method for measuring changes in consumer prices is actually as all-American as Enron's accounting practices............................

(Aug 16, 2007)- "The housing bubble has burst. Prices are going to collapse and sales are going to fall through the floor." -Peter Schiff 

 

Aug 7 -- Hovnanian Enterprises Inc., New Jersey's largest homebuilder, cut the number of unsold houses by more than 50 percent over the past two years after lowering prices and still had 1,500 on its books as of April. ``We pretty much start a home these days when we have a contract from a buyer wanting to purchase one,'' Chief Financial Officer Larry Sorsby said in an interview from his office in Red Bank, New Jersey. The company's sales price in the northeast for homes under contract dropped 7.4 percent in April from a year earlier. ``We don't build them and hope they come", he said. There are 3.9 million unsold existing single-family homes, the most since at least 1982, when the Chicago-based National Association of Realtors started compiling the data. The inventory of existing houses and condominiums must fall by almost 50 percent for prices to stabilize, said William Wheaton, an economics professor at the Massachusetts Institute of Technology in Cambridge. There is an 11.1 month supply of existing unsold homes at the current sales pace, up from 4.6 months in September 2005, according to the National Association of Realtors data. It now takes 10 weeks to 12 weeks on average to sell a house, compared with four weeks or five weeks at the height of the five- year housing boom, said Walter Molony, a spokesman for the Realtors group.................................


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(Sep 21, 2007)- "With the Federal Funds Rate cut, the Fed revealed that it has no interest in defending the dollar or containing inflation. This kind of irresponsibility is all gold needs to move higher from its current levels unless the Fed somehow finds its backbone within a year or two, then gold has a good chance to take out its inflation-adjusted high of nearly $2,000 per ounce within this decade." -Peter Schiff

 

 

(July 31, 2007)- "It's going to soon hit $90 and go north of $100 next year. We should see $150 to $200 oil in the next two to three years because of the drop in the dollar.'' -Peter Schiff