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Imagine walking into a brand new house with a fresh roof, warranty, and shiny appliances, and finding out it costs less than the 15-year-old house a little further down the road. With the leaky ceiling. This is not a joke and not a typo. This is exactly what is happening in real estate markets across the country, and one of the loudest voices in the financial world, Peter Schiff, says this is the first crack in a wall that is about to collapse.
By the end of this video, you will understand why he believes this, and perhaps you will never look at your house, your bank, and your savings the same way again. Before we get in, please do me a small favor. Subscribe to the channel and activate the bell, because the second half of this story is going to be even wilder than the first and I do n't want you to miss the next video .
And now stay tuned, because the part about the banks will blow you away. Let's start with the number that triggered all of this. Mortgage interest rates are around 7.5%. Ask yourself what that really means for a completely normal family. Imagine two people with exactly the same salary. One of them bought his house back when loans still had 3% interest and could comfortably afford a house for $500,000 with that income .
The other person is coming today, interest rates are at 9%, and the same salary is only enough for a $250,000 house. Same job, same salary, but purchasing power was simply halved. Schiff says that if the monthly payments are to be as high as with 3%, then house prices must also be halved. Not just lowered a little, not just nudged a little , halved.
And then comes the gruesome turn of events. At the same time, the costs of building a house are rising. Schiff names three culprits. The first is good old inflation, which makes wood, concrete, cables and practically everything else more expensive. The second factor is tariffs, which add another layer to the material costs.
The third is immigration policy. He says the approach has been successful in the sense that there are fewer undocumented people in the country, but he reminds us that many of these workers were the ones who actually built the houses . If you remove them, construction companies suddenly have to hire legal workers, and they want significantly more money.
Construction companies are therefore being squeezed from all sides . Costs are rising, buyers can't afford the product, and the finished houses are standing there waiting for someone with a bigger budget, who doesn't exist. Therefore, Schiff says that home builders are in a really difficult situation.
They can't build a house that the average American can afford, so they're stuck with the houses they've already built. And the only way to get rid of these houses is to lower the prices. Think about what that means for the people who make a living from construction. If nobody can afford new houses, fewer houses will be built and there will be fewer jobs.
He expects a wave of unemployment across the entire real estate sector, calling it the weakest period for construction and sales we have ever had, until, as he says, the floor completely collapses. Now we're talking about the evidence, because Schiff didn't just make this up . Take a look at the Pending Home Sales Index.
It has never been lower than it is today in the last 25 or 26 years . Let that sink in for a moment. Lower than in the dark days of 2007. Lower than in 2008. Lower than in 2009. In the midst of what we remember as the worst housing catastrophe in modern history, more homes changed hands than now. And he warns that it goes even further down from here .
Next, look at the mood of the people who are actually building the houses . The Housing Market Index for September, which measures the confidence of construction companies, has fallen to 29 . This is the weakest figure since 2012. In addition, 43% of construction companies are lowering their prices.
Almost half of them. These are not people who are looking to the future with optimism . These are people who are so nervous that they would rather accept discounts just so that a buyer will actually walk through the door. And this is where it gets really strange. In many markets across the country, brand new houses are now being sold for less money than existing houses.
Pause for a moment and consider how wrong that is. A new house should cost more. It's new. Nobody has lived in it, nothing is worn out, and it comes with a warranty. The fact that it's cheaper than a used house is like saying a new car in the yard costs less than the same model with 60,000 miles on the odometer.
The only reason for this is desperation. The property developers are sitting on their existing holdings. They need to get rid of him, so they lower the prices. Why do n't ordinary homeowners do that too. Schiff explains it with a simple comparison. A homeowner owns only one house. Many of them have a mortgage with three or four percent interest, so there is no reason for them to panic.
They can simply continue paying, wait and hope for the price they believe their house deserves. A building contractor doesn't have that luxury . He has a property full of unsold houses, piling up interest payments, and workers who need to be paid. He needs to move goods, and he needs to do it now. So the building contractor becomes realistic first, while the homeowner is still living in his daydream .
But this daydream has an expiration date. Schiff says the discounts on new builds will drag the entire market down because of one very simple question. Why would anyone buy a used house when a brand new one costs less? A used house that is 10, 15 or 20 years old brings surprises . The air conditioning can fail; the appliances break down one after the other .
The roof may need to be replaced. A new house has none of that. Everything is fresh and a guarantee covers the rest. From his point of view, prices for new buildings are therefore an early indicator, and prices for existing houses have no choice but to follow them downwards. And he does n't believe the decline will be small .
A small decrease would solve nothing. Schiff says prices need to fall sharply, at least as sharply as in the 2008 financial crisis, i.e. by about 30%. Even that might not be enough, especially if mortgage rates continue to rise. He says it's easy to imagine that interest rates will be at 8.5% at the beginning of next year and then at 9%, and remember the calculation from the beginning: at 9%, this budget of $500,000 will become $ 250,000.
Let's pause here for a moment, because I want to clarify something: what I'm sharing here are Peter Schiff's arguments, and his views are strong, but not everyone shares them. But even if you think he's wrong, you should know his reasoning, because the next part is the one that keeps bankers up at night.
If this video is already making you think , leave a comment and tell me if you believe that real estate prices will soon crash or if you think Schiff is exaggerating. I read the comments, and the best discussions take place down there. Now we come to the part that, according to Schiff, almost nobody talks about.
Everyone is worried about the homeowners. Schiff says we should be worried about the lenders and he says he saw this coming ten years ago . Here is the story. Think back to the years when banks offered 30-year mortgages at 3% and 4%. Everyone cheered because it was great for the borrowers . People kept refinancing their debts.
Over the years, the banks held mortgages at 8%, then 7%, then 6%, then 5%, and every time someone refinanced, they got a shiny new 30-year loan at a lower interest rate. Every debt restructuring reset the clock. As a result, banks were repeatedly left with brand-new 30-year loans that brought them less and less profit.
As long as the Federal Reserve kept interest rates near zero , this didn't seem to cause any harm. On the contrary, when mortgage rates fell, the value of the loans already held by the banks increased, and everyone felt like geniuses. Now turn the whole thing around. Interest rates have risen. Mortgage rates are around 7.5% and banks are stuck with a mountain of old, poorly yielding loans , with no way out.
How big is this mountain? Schiff says there are approximately eight and a half trillion dollars in outstanding fixed-rate mortgages. The average remaining term is 25 years and the average interest rate on the entire pile is 4.6%. Some are significantly lower. Schiff says he himself has a mortgage with 3.375% and he knows people with interest rates below 3%.
This is fantastic news for the person who pays the installments. But for the lender, it's a nightmare, because the bank has to wait decades for an interest rate that is far below what the market is paying today. What does that cost on paper? Schiff says that if lenders had to value these mortgages at today's market prices, the unrealized losses would amount to about $2 trillion on these $ 8.5 trillion.
Imagine a bank that wants to sell a loan portfolio that will pay 4.6% for another 25 years, while new buyers elsewhere are getting seven and a half percent. Nobody pays the full price for that. The buyers want a significant discount, and this discount is the loss. The banks have a standard answer to that.
They say these are not real losses because they have no intention of selling. If they simply hold onto the loans for 25 years, everything will be fine and they'll be in the clear. Schiff says this plan has a major problem. You might not even be allowed to keep them. A bank can be forced to sell if its depositors want their money back.
That's exactly what happened with Silicon Valley Bank and Signature Bank. Customers wanted their cash, so banks had to sell assets that had lost value, turning paper losses into real losses and causing the banks to go under. The ship continues on . He argues that the entire financial system is in a kind of hidden insolvency because it is full of assets that cannot be sold without huge losses .
If depositors rush for the exit, a bank holding these loans cannot return people's money. She ca n't tell a customer, "We'll pay you back over the next 25 years," the way our mortgages pay us back. Customers want their money today. And when every mortgage is only worth about 80 cents to the dollar, the money simply is n't there.
Here is an important distinction on which Schiff's argument is based. A bank can survive paper losses as long as it is liquid. That is, as long as she has enough cash when people come and ask for it. But the moment depositors demand their money back, paper losses become real losses. That's the difference between a bank that looks healthy and a bank that is collapsing.
And he says that ordinary savers should not only ask whether a bank is profitable, but also how it is financed. Then came the sentence that made my jaw drop. According to Schiff, this paper loss will grow from $2 trillion to $3 trillion if mortgage rates rise to 8.5% . And remember, he's talking about mortgages that won't become non-performing.
These are [ahem] loans where the borrower pays on time every single month. The loss arises solely because the market interest rate is higher than the interest rate on the loan. Now compare that to the 2008 model. The financial crisis, which almost brought the world to its knees, was caused by approximately $450 billion in realized losses from defaulted mortgages.
450 [ahem] billion. Today's unrealized losses of 2 trillion are more than four times higher. And that's before anyone has even missed a payment. There is one more detail that, according to Schiff, people forget. In 2008 [ahem] only about 10% of mortgages defaulted. The other 90% were paid on time. And these loans have actually gained value because the Fed pushed interest rates to zero and mortgage rates have plummeted.
He estimates that the unrealized profits on the mortgages outstanding at the time amounted to approximately $1.3 trillion. That is more than the realized losses from the defaults. So, although lenders took a big hit from the bad loans , the value of their overall portfolio rose more than they lost. Strangely enough, the banks ultimately got off lightly .
This time, he says, it's exactly the opposite. The banks lose money on 100% of their mortgages, not 10%. Even if no one drops out, they're still underwater. And Schiff doesn't hold back when it comes to who is to blame. He says the lenders were foolish to issue brand new 30-year loans with an interest rate of 3.something .
Especially during the last wave of debt restructuring during the Corona pandemic, when interest rates were at zero, did they really believe that interest rates would remain so low for so long? He says no, they didn't care. They wanted the fees for the debt restructuring, and they collected them. In his opinion, the banks would have been better off if they had rejected every single one of these loans .
And this is where Schiff's old advice catches up with the banks. He says he advised his podcast listeners to borrow money for 30 years, take out the largest possible mortgage, and secure this low interest rate. He told them they would not become rich as homeowners, but as debtors, because they would be holding cheap money for decades .
And the reason the borrower wins, he explains, is that the lender loses. It 's a negative-sum game. Normally, the lender earns money by collecting interest. In this case, the lender does not receive enough interest and the borrower is the one who has all the cheap money. He even points out that someone with a 3% mortgage could simply park their money in a money market account that pays over 4% and pocket the difference.
And what happens if interest rates rise to 5, 6 or 7%? Then the banks are finished, he says. They are bound for another 25 years and have lost a fortune before even a single one has defaulted. But, and this is the highlight of the whole story, according to Schiff, there are also payment defaults. Because as soon as house prices start to fall , borrowers run out of reasons to continue paying.
Even with a fixed interest rate, if you owe more than the house is worth, you might not want to stay. Let me give you the example he uses, because it's brilliant. Imagine you own a house worth $500,000 and owe $400,000 on the mortgage. You feel pretty good because you have $100,000 in equity. Then the prices fall and the house is now worth 300,000.
Suddenly you're $100,000 in debt, then your roof leaks and the repair costs $40,000. Would you invest $40,000 in a house that already costs you $100,000 more than it's worth? None of that money would ever come back to you . You would only be helping the bank . So you might say, forget it, I'm not fixing the leak , I'm gone and you leave the problem to the bank.
And then the dominoes fall, because life doesn't stand still. People get divorced, people move, people lose their jobs. Older homeowners die and their children, let's say three, do n't want the house or can't divide it differently, so they have to sell it so that everyone gets a third . All these forced sales hit the market simultaneously and push prices down even further .
Schiff points out that even politicians don't want to confront this. He says Donald Trump is making a big fuss about protecting homeowners' equity because he doesn't want older Americans to have to watch their equity disappear. But Schiff says it will happen anyway, whether anyone likes it or not. Now imagine the banks.
They face losses of hundreds of billions of dollars from defaulted mortgages, just like in 2008. But this time there are no profits on healthy loans to cushion the blow. Instead, they have trillions in unrealized losses on top of that. Some banks might be forced to realize these losses, and if they do, they will go under.
And now comes the creepy part. All the major banks that were rescued in 2008 are bigger today. If one of them falls now, the damage will be even greater. And then there's the governmental side of the story. Schiff has been saying for years that Fannie Mae and Freddie Mac will need another rescue . He says the losses will be terrible.
Together they insure more than 7 trillion dollars of this 8.5 trillion dollar mortgage landscape. And the loans that are most likely to default are those where the borrowers are deepest in debt . And those are exactly the ones that will hurt the most. He also warns that not everyone has a fixed-rate 30-year mortgage.
Some people have taken out a variable-rate mortgage that was fixed for 5 years and then adjusted. Some people took out a 15-year mortgage 10 or 12 years ago, and its term is nearing its end, which means they will soon have to refinance . With today's interest rates, this will be a painful process. Schiff therefore calls it a time bomb in the mortgage market and says the whole picture looks very similar to 2008.
Let 's take a quick breath and summarize, because that's a lot. The story begins with something small and easily recognizable. New houses that are cheaper than old ones. That's when the construction companies blink first. The real problem lies beneath the surface: affordability. Interest rates of around 7.5 %, with a trend towards 9%, have halved the purchasing power of the typical buyer .
Costs are rising due to inflation, tariffs and labor shortages, meaning that builders cannot build houses cheaply enough for buyers to afford them. Sales are at their lowest level in about 25 years, and confidence among building contractors is at a 13-year low. Then comes the second level, which, according to Schiff, is even more dangerous.
Banks are sitting on around 8.5 trillion dollars of fixed-rate mortgages with an average interest rate of 4.6% and a remaining term of 25 years. Valued at market prices , this equates to approximately $2 trillion in unrealized losses, and it could rise to $3 trillion if interest rates climb to 8.5%.
Compared to the 450 billion in realized losses triggered by the 2008 crisis, this is a monstrous number. And unlike in 2008, there are no large unrealized gains to offset them. The final level is the human one. When prices fall, equity disappears. People who have lost their equity could simply leave if problems arise such as a leaky roof, and forced sales due to divorces, job losses, and inheritances further increase the pressure .
Defaults are increasing, lenders are suffering real losses in addition to paper losses, and Fanny and Freddy are being dragged in as they hedge more than $7 trillion of the market. And what is the lesson for you? Schiff's message to investors is to separate credit risk from interest rate risk. Credit risk is the risk that a borrower will not repay you.
Interest rate risk is the risk that the money you have lent is worth less because interest rates have risen. Banks can lose money through the latter, even if the former never occurs. The lesson for savers is to look beyond the headlines and ask how a bank is financed and how liquid it really is. And for anyone who thinks their wealth is safe because their house shows a certain value on a website, paper wealth is not the same as wealth you can actually access.
I also want to be fair. These are Peter Schiff's predictions, and he has a long history of making bold forecasts. Some consider him a visionary, others too pessimistic. I'm not here to tell you what to do with your money. I'm here so you've heard the argument, so that the next time there's a headline about house prices, mortgage rates, or a shaky bank, you'll know exactly what to look out for .
So here is my question for you. If a brand new house costs less than a used one, what do you think will happen to the price of your house? Write your answer in the comments, because I want to know if you think Schiff is right or not. If this video was helpful to you, please like it, share it with a friend who owns a house or is thinking about buying one, and subscribe to the channel so you do n't miss the next analysis.
And remember , the things that everyone ignores today are often the things that everyone will be talking about tomorrow. See you in the next video.
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