Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: marginmike who wrote (46515)	1/2/2006 5:58:56 PM
From: CalculatedRisk	Respond to of 306849

Paul McCulley Discusses PIMCO’s Cyclical Outlook and Investment Strategy pimco.com Excerpt: Q: Would a slowdown in U.S. housing that leads to slower consumer spending constitute a breakdown in the Bretton Woods II arrangement? McCulley: The overall framework of Bretton Woods II will continue as long as the U.S. still has a hefty current account deficit and the rest of the world maintains mercantile growth strategies. Real long-term interest rates will continue to be held down by the Bretton Woods II arrangement, which gives us a very flat yield curve. But the level that the Fed has achieved, or will achieve in the months ahead, in the front end of the yield curve is cutting off the exotic mortgage conduit-which has been the preferred vehicle for the speculative element in the property market. So, notwithstanding the Bretton Woods II arrangement, the Fed does have the ability to bring the U.S. property market off the boil, which is a key element in slowing down the ability of the household to extract equity from their home and therefore a key element in the slowdown in consumer expenditures that we anticipate. Q: PIMCO is following the U.S. housing market very closely, forming a research team and sending people around the country to observe regional markets for signs of a slowdown. What did the team have to say at the December Forum? McCulley: At the December Forum, Scott Simon, our mortgage guru, gave a special presentation detailing the work of his group on the state of the housing market and the mortgage market. Their key conclusion is that the leading indicators of a slowdown in housing have clearly turned. Going back to September, the group identified the leading indicators but those indicators had not yet turned at that point. The leading indicators for the housing market have now turned and we anticipate that the market itself will be turning in the months immediately ahead. One key indicator is that the inventory of unsold homes is rising, as former buyers are becoming sellers, trying to monetize their speculative gains. Price discounting in selective markets is a second leading indicator. And probably the most important indicator that we are seeing is a severe slowdown in the affordability associated with exotic mortgages. In fact, we’re now seeing layoffs by mortgage brokers who specialized in exotic mortgage creation. A key characteristic of the property market is that it’s very momentum-driven. This is sometimes called a "reflexive" market, meaning that people are more excited when prices go up even though there is less value, and less excited when prices go down even though there is more value. Because of reflexivity, once momentum turns and home price appreciation slows, we should see a rather dramatic slowdown in volumes. Home prices don’t have to actually fall for you to have a sharp slowing in the volume of transactions. That is a key analytical aspect of our forecast that a slowdown in home price appreciation will have a bigger impact on the household’s ability to withdraw equity than the consensus probably thinks.