Peter Schiff Warns Home Prices Could Plunge as Mortgage Lenders Face $2 Trillion In Losses: ‘Already In Worse Shape’ Than During 2008 Crisis
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Peter Schiff, chief economist and global strategist at Europac, said mortgage lenders are "already in worse shape than they were at the depths of the 2008 financial crisis" as he warned that rising mortgage rates could force home prices lower.
Schiff made the remarks on Wednesday on "The Land Development Podcast," hosted by Ryan Glick. He said mortgage rates are rising for the same reason Treasury yields are rising: inflation is becoming a bigger problem, so lenders need compensation for lost purchasing power.
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Schiff on Mortgage Rates
Glick noted that mortgage rates have climbed above 7.5%. Schiff said rates of 7.5% are "still a relatively good deal" compared with history, since they reached as high as 18% in 1981 and were typically above 7.5% before the 2008 crisis.
The problem, he said, is that real estate prices have tripled over the past 20 years. Financing a $200,000 mortgage at 7.5% is different from financing a $600,000 one. "People just can't afford it," he said, adding that home sales have collapsed and sellers "haven't capitulated yet to reality."
Schiff said that if even a small share of sellers cut prices, such as from $600,000 to $400,000, comparable sales would reset nearby home values and erase home equity.
He added that some homeowners might choose to stay in their properties despite losing equity because their existing mortgage rates could still be cheaper than renting another home. However, he warned that other homeowners could decide to walk away from their mortgages, leading to defaults.
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Schiff on Lender Losses
Schiff said lenders face unrealized mark-to-market losses on their mortgage books. He said about $8.5 trillion in fixed-rate mortgages carry roughly $2 trillion in losses, which would reach $3 trillion if rates hit 8.5%. He said lenders lost only about $500 billion during the housing bust.
Schiff warned that these losses could increase further if mortgage defaults begin, saying losses would "skyrocket even more" once defaults start.
Rising rates have also been squeezing buyers and builders. Estimated monthly payments on a median-priced resale home had risen 97% since January 2020, according to John Burns Research & Consulting, versus a 33% rise in incomes and a 48% rise in home prices. The estimate assumes a 5% down payment and a 30-year fixed-rate mortgage, including mortgage insurance.
The pressure on housing demand is also visible among homebuilders. Last month, D.R. Horton, Inc.reported quarterly results where it saw weaker demand and declining sales prices amid high mortgage rates and affordability pressures. The company's management warned of continued margin pressure in fiscal 2027.
Image via Shutterstock
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