Even though I am not a bond market wonk, I always enjoy founder William Gross’ monthly podcast on the bond market and learn a lot from PIMCO’s insight. PIMCO has contacted me in the past to get information about the housing market.
In their In Focus series Scott Simon Discusses PIMCO’s Views on the U.S. Housing Market. They post a series of questions to him and this was the one I found most interesting:
Q: Considering the negative conditions in the housing market, why does PIMCO expect a gradual slowdown in house price appreciation this year rather than a rapid slowdown or an outright decline?
Simon: When we look at the housing market, the analogy we use is a supertanker, in that when you go to full throttle, it takes a really long time to speed up. In fact, the two biggest quarterly increases in house prices occurred last summer and last fall, which were a year and a quarter after the Federal Reserve started raising rates. In other words, the housing market was still accelerating after the Fed had shifted into reverse. And even when you throw it into full reverse, the housing market takes a while to slow down, just like a supertanker that takes 23 miles to stop if you throw it in reverse from cruising speed.
We’ve looked at housing bubbles over the last couple of hundred years and one thing that was very consistent and I think was really clear is that bubbles only burst when there is a lot of unemployment. If you just look at the last 25 years, there are two examples of housing bubbles that burst. One was in California in the early 1990s, when virtually the entire defense industry got laid off and there were 20 for-sale signs on a block. The other big case was the Texas-Louisiana oil patch problems of the 1980s where you had 35% unemployment regionally.
In both cases, the banks ended up owning property that they wanted to get out of and ended up selling at any bid. That’s how housing prices go down. Otherwise, people just live in their houses and the number of home sales really goes down a lot, but prices don’t have to collapse because people have to live somewhere.
Many people are impatient when it comes to the housing market, but the reality is that the housing is not a speedboat, it’s a supertanker that just doesn’t speed up or slowdown that fast—unless it hits an iceberg like a big jump in unemployment.