In PIMCO bond giant founder Bill Gross’ monthly Investment Outlook column this month, The End of History and the Last Bond Bull Market, after expressing his excitement for his new iPod, (his IO columns have been available as a downloadable podcast format for quite a while now and worth listening to) has basically concluded that the bond market has bottomed out (bond prices low = mortgage rates high) and mortgage rates will fall.
“The tightening cycle in the U.S. seems to have run its course, primarily because of its effect on housing and related repercussions on consumer spending and economic activity.”
Another key point.
House price booms are typically preceded by a period of easing monetary policy with FF rates bottoming out about three years before house prices peak. Rates then reverse quickly (after the peak) in response to falling GDP growth.
PIMCO has observed that the weakness in the housing market this year is understated and that prices in many local markets are actually declining.
2nd quarter GDP results are to be announced today and it is expected to show a fairly sharp decline in the annualized rate (although still healthy), from 5.6% in the 1st quarter, to
around 3% 2.5% [update] in the 2nd quarter. Consensus says that GDP will continue to fall through the end of the year, one of the clearest signs that the housing market is cooling our jets.
A weaker economy will stop the Fed tightening and may be forced to begin reducing rates in 2007 (I believe so) because the Fed has overshot their target. PIMCO believes that mortgage rates will fall as a result.
This doesn’t mean another real estate boom, however, rather this would more likely be help to shore up the damage to the housing market caused by rising rates which in turn weakened the economy. In housing markets not in bad shape, for example those with low speculative activity, could see a modest recovery.