William H. Gross of PIMCO writes about the cycle of real estate and our danger of slipping into a recession [PIMCO]:
Housing prices will cool/stop going up very much/even go down in some cities, WHEN…
a. Interest rates rise to a high enough level to make the purchase of a new home a burden instead of a boon for first time buyers.
b. Mild regulatory pressure begins to reduce the amount of funny-money lending.
c. Speculators sniff the beginning of the end.
Home equitization should retreat shortly thereafter.
- Consumption/the U.S. economy will then weaken when the house ATM starts running out of fresh new $25,000/$50,000/$100,000 home equity loan dollar bills.
- The Fed will cut interest rates in order to start the game all over again.
The factors affecting the US Economy’s fate are:
- oil/natural gas prices [Slate]
- China’s economic growth
- foreign willingness to buy our Treasury bonds
He concludes that the froth in the housing market is leaving and higher mortgage rates will make a recession nearly inevitable, possibly requiring the Fed to lower short term rates in mid-2006.
The result? Housing appreciation slows to single digits next year, thereby having a soft landing.