Housing Market Hindsight

Low Interest Rates -- Then & Now

Three (four?) years into the housing market downturn, what conclusion is it possible to draw?

In retrospect, it seems obvious (at least to me) that it was a liquidity-driven phenomenon.

Add a tsunami of cash, subtract any vestige of underwriting standards, and real estate will go up.

Subtract liquidity, and tighten lending standards . . . and it goes down.

No Pop from Low Rates

Astute market watchers will point out that, if cheap money drives real estate upwards, it should be positively flying now, because mortgage rates are at record lows.

What that analysis ignores is: 1) the cheap money is itself a symptom of the downturn, as the Fed is using cheap money (free to the banks) as its weapon of choice to support housing (the so-called "hair of the dog" cure); and 2) to qualify for a cheap mortgage, you must have good credit and a job.

If you're a move-up Buyer, you also need some equity for a downpayment.

PIMCO's Bill Gross

Limits to "Hair of the Dog" Fix
For Sovereign Borrowing Hangover

Can you get out of a debt crisis by piling on another layer of debt?

The answer, of course, is that “it depends.”

Replacing corporate and mortgage debt with a government checkbook is initially beneficial because the sovereign is assumed to be more creditworthy than its private market serfs. It taxes, it prints, it confiscates wealth if need be and so this substitution is medicinal in the early stages of a financial crisis aftermath – especially if debt/GDP levels are low to begin with.

But based on existing deficit trends and the expectation that not much progress will be made in reducing them, markets are raising interest rates on sovereign debt issuance either in anticipation of higher future inflation, increased levels of credit risk, or both. This places a potential “cap” on the “debt” that supposedly can be created to get out of the “debt crisis.”

--Bill Gross, PIMCO March 2010 Investment Outlook

Anyone who runs almost $1 trillion in bond investments -- as PIMCO's Bill Gross does -- automatically rates a listen.

More to the point: the reason Gross oversees that much money is that . . he's a very smart guy!

Hard to disagree with any of his analysis (above).