Thanks to The Housing Bubble 2 for alerting us to the following:
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?
A: 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.
So even if you don’t want to listen to us, perhaps you’ll listen to a firm with over $500 billion under management (i.e. PIMCO).
∙ Paul McCulley Discusses PIMCO’s Cyclical Outlook and Investment Strategy [PIMCO]
∙ Top O’ The Market To You! [SocketSite]