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Peter Schiff Warns Housing Poses Problems in 2011

* When Peter Schiff of Euro Pacific Capital joined us for our New Year's Eve show he talked a lot about his very bearish forecast for the US housing market.

We thought it might renew your interest in this post, first published earlier in the week.

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If you’re like millions of Americans, you probably thought buying a house was one of the best investments you could ever make. And watching your home’s value decline over the last few years probably makes you a little nauseous.

Well, after hearing from Peter Schiff of Euro Pacific Capital, you may need some Dramamine.

On CNBC’s Halftime Report Schiff revealed an alarming forecast; one that he also penned for the Wall Street Journal. He says, despite the sharp drop since 2007, “housing prices based on historical measures are about 20% above where they should be.” In other words prices haven’t fallen enough.

His argument is largely predicated on his belief that the main reasons home prices stabilized recently is because the government has propped them up.

He says, “the home buyer's tax credit, record low interest rates, government mortgage-assistance programs, and the increased presence of Fannie Mae, Freddie Mac and the Federal Housing Administration in the mortgage-buying business have, for now, put something of a floor under house prices.”

Schiff makes the argument that without these artificial means of support, prices would have continued to fall.

In fact, he thinks they should have fallen – and fallen a lot. “Considering the weakness in the economy and the glut of houses on the market, housing prices should be below their historical averages.”

In case you’re wondering how Schiff arrived at a 20% drop – it’s a simple case of calculating a reversion to mean.

He’s crunched numbers and found that “in the 100 year between 1900 and 2000 home prices in the US increased an average of 3.35%.

If home prices had followed that average trajectory he says the Case Shiller Index should be at 126.7 (in October). Instead, it was at 159.

”This would suggest the index would need to decline an addition 20.3% from current levels.”

For what it’s worth Schiff does tell us, “we don’t have to get there through a big drop in the price of houses; we could also get there because the price of everything else but houses goes up.”

But either way, if Schiff is right, homeowners are looking at pain.

We know that Schiff is a tad dramatic – some would say alarmist – but his forecasts are not without merit.

In late 2006, Schiff predicted the housing bubble and resulting subprime mortgage crisis and in late 2008, he predicted the automotive industry crisis and the crisis in the banking and financial markets.

I’ve you agree with Peter Schiff’s thesis, Steve Cortes says the trade is short the XHB .


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Trader disclosure: On December 30, 2010, following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Cortes Is Short (XHB), Is Long S&P; Cortes Is Short (XRT), Is Long S&P; Cortes Owns (TSN); Cortes Is Short (LVS); Cortes Is Short (DB); Cortes Is Short (BCS); Cortes Is Short Gold; Cortes Is Long U.S. Dollar vs. Mexican Peso; Jon Najarian Owns (AAPL), Is Short (AAPL) Calls; Jon Najarian Owns (VZ), Is Short (VZ) Calls; Jon Najarian Owns (MSFT), Is Short (MSFT) Calls; Jon Najarian Owns (IBM), Is Short (IBM) Calls; Jon Najarian Owns (BBY), Is Short (BBY) Calls; Jon Najarian Owns (ADBE), Is Short (ADBE) Calls; Jon Najarian Owns (V), Is Short (V) Calls; Jon Najarian Owns (NXY), Is Short (NXY) Calls; Jon Najarian Owns (WLT), Is Short (WLT) Calls; Jon Najarian Owns (VLO), Is Short (VLO) Calls; Jon Najarian Owns (GS), Is Short (GS) Calls; Jon Najarian Owns (MS), Is Short (MS) Calls; Jon Najarian Owns (ANR)

PATTY EDWARDS
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