Historical Norms Don't Apply
Nov 17, 2006
As new statistics confirm the
extent of the real estate market collapse, many wishful thinkers
now herald bad data as positive omens. For example today's release
of dismal October housing start figures convinced many naive
economists that the market was on the mend. They argued that
the 14% decline in housing starts from September (the lowest
activity in six years) and the lowest number of building permits
for the last nine years would solve the problem of oversupply,
thereby restoring balance to the market. Talk about lemonade
The current glut of homes comes when home ownerships rates are
at the highest levels in history while home affordability is
at its lowest. The recent reduction in new and future construction
is too little and comes too late to restore balance. The optimistic
reaction is based on comparisons to historical averages of prior
real estate down-turns. However, a comparison of the real estate
mania of 1996-2005 to any prior national real estate boom reveals
the folly of applying historical norms to the current correction.
Economists, market strategists, and homeowners who still harbor
a dream of a real estate soft-landing, with marginal price declines
and minimal spill over into the broader economy, are in for one
of the ruddiest awakenings of all time.
A variety of factors have combined to create market conditions
that simply did not exist in the past. The widespread elimination
of lending standards, down-payments, documented loans, and full
amortization, combined with rampant proliferation of speculation,
leverage, over-building, "creative" financing, re-financing,
equity extractions, teaser rates, phony appraisals, ARMs, negative
amortization loans, second and third home purchases, and out-right
mortgage fraud, have created home prices that are completely
untethered from reality.
Furthermore, more so than during any other period of American
history, consumer spending is now largely dependent [on] home equity extractions and temporarily
low mortgage payments. As a result, predictions as to how the
real estate slowdown will impact the economy should be made by
comparisons to the deflation of prior asset bubbles. However,
fallout from the bursting of this bubble may be more damaging
than virtually any financial correction that we have experienced
since the Great Depression.
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C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.