As the U.S. housing market grapples with its lowest sales since the mid-1990s, economist Peter Schiff warns of a looming crisis in which homeowners are resorting to renting their properties to retain their existing mortgage in what he calls a deteriorating economy.
With the National Association of Realtors (NAR) reporting a slump in existing home sales and a surge in median sales prices last week, Schiff, on his The Peter Schiff Show podcast, pointed to a potential trend in the real estate market in which homeowners will begin renting out their homes to retain the properties on which they have low mortgage rates versus selling on the open market, which would cause them to take on a new mortgage with a higher interest rate.
“Existing homes aren’t selling,” Schiff said. “The people who are in them have low mortgages and they’re not motivated to sell, and the people who want to buy them can’t afford to buy them because they can’t get those rock-bottom mortgage rates.
“The guys that own the homes don’t want to sell because where are they going to live? I mean, they’ve got these cushy low mortgages that they don’t want to give up. Now, maybe they’ll rent out their homes so they can hang on to the mortgage.”
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Last week, the NAR reported that existing home sales dropped to a seasonally adjusted annual rate of 3.78 million, marking a 1 percent month-over-month decline and a 6.2 percent decrease year-over-year. At the same time, the median sale price of existing homes rose to $382,600 in December, a 4.4 percent increase from the previous year, continuing a trend of escalating prices.
“This is more of a sign of just how bad the economy is, and it’s going to get a lot worse than that,” Schiff said.
Newsweek has reached out to Schiff via his website for comment.
The situation, which is forcing homeowners into what experts call the “lock-in” effect, is compounded by the interest rate hike campaign that the Federal Reserve embarked on last year aimed at curbing inflation. While the Fed has signaled that its job is done in terms of rate hikes, the effects are long lasting, especially on mortgage rates.
Orphe Divounguy, a senior economist at Zillow, expanded on Schiff’s observation, telling Newsweek that “so long as mortgage rates remain elevated, homeowners with lower mortgage rates will be reluctant to give up their low monthly payment and trade it for a larger one at a higher mortgage rate if they don’t have to.
“Homeowners who took advantage of extremely low rates to either buy or refinance their mortgages are sitting on a fantastic asset, financially,” Divounguy said, adding that the tech-first real estate marketplace predicted that this situation was going to happen heading into 2022, and “for many homeowners it still holds true.”
Daryl Fairweather, chief economist at Redfin, echoed Zillow, telling Newsweek that it observed “homeowners being locked in by their low mortgage rates in summer 2022 when rates first started their dramatic rise.” Fairweather said that “the mortgage rate lock in effect is still a large force keeping homeowners from selling.”
However, Fairweather said that Redfin is starting to see a “gradual recovery” as homeowners who delayed selling because of high rates are now coming to market, driven by life events that outweigh financial considerations.
Still, Schiff said on the podcast that even though mortgage rates have come down from the highs of more than 8 percent in October, “they’re still not low enough for [buyers] to afford the prices that the existing homeowners want.”
Uncommon Knowledge
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Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.