According to Newport Beach, Calif.-based PIMCO's Bill Gross, the party of rapid home price appreciation should come to a fizzle within the next three-to-six months.
"Make no mistake about it, the froth in the U.S. housing market is about to lose its effervescence; the bubble is about to become less bubbly," wrote Gross in his October investment outlook released last week. The question on the minds of many, whether that decline will be a soft descent or a rapid fall, is not answered by Gross, but as others have concluded, he writes that the economy could escape recession in the first scenario, albeit with an economy that loses 1% to 2% of its GDP. For exotic mortgage wielding homeowners, there could be a softened blow if the slowdown results in cuts to short-term interest rates.
Gross estimates that real housing prices have historically peaked four-to-six quarters following the first time an economy's central bank raises short-term interest rates and after about a 200 basis point increase, topping out after rates rise 300 basis points. "I find it illuminating that our own Fed has raised policy rates for nearly five quarters now to the tune of 275 basis points, dead on the average point where real housing prices have peaked over the past 35 years," he wrote. The number of Americans for whom it would be financially feasible to own a home is also at a 15-year low, and lenders are becoming increasingly reluctant, Gross added.
According to a September study co-authored by Federal Reserve chairman Alan Greenspan, homeowners borrowed $600 billion in 2004 against their homes, amounting to some 6.9% of disposable personal income in the country. That compares with around 3% in 2000 and less than 1% in 1993.
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