Well, yes, if we believe former Fed Chair Alan Greenspan. Two months ago, he claimed "the housing market had already bottomed," citing a stabilization in mortgage application rates to buttress his view.
Uh, not so fast, Al.
Jeffrey Gundlach, chief investment officer and fixed-income expert at money-management firm TCW Group, differed with Easy Al in an interviewin Barron’s. Gundlach said "Greenspan is out of his mind to declare a bottom in the housing market after just a six-month slide. This is the kind of silly optimism that one would expect from somebody who’d just passed his real-estate brokerage exam and was hoping to drum up some business."
"Gundlach, in contrast, sees lots of trouble ahead for U.S. residential real estate. In fact, he sees no bottom in the slump until at least 2008 and no meaningful recovery until at least 2010. Nor is he particularly sanguine about the economy, in light of this housing downturn. Among other things, he sees about a 60% probability of the U.S. falling into recession by the middle of next year with housing alone lopping off at least 1.5 percentage points in growth.
A weak housing market will hurt in a number of respects. Consumers are less likely to spend freely when their biggest asset is getting drilled. Then too, housing accounts for a major chunk of U.S. employment when one accounts for all the construction, finance and retail jobs that depend on a lusty new-construction and resale market. Nor with home prices stable or falling will as many U.S. consumers be able to avail themselves of cash-out refinancings to underwrite their lifestyles, says Gundlach."
While Gundlach may be talking his book — he is a long-time bond fund manager, after all– he is mnore knowledgable than most. Over two decades at Trust Co. of the West, he has chalked up an enviable record running fixed-income portfolios, particularly for mortgage-backed securities, the firm’s specialty.
And his experince suggests that the housing bust is only in its early innings:
"For one thing, the unprecedented dimension of the preceding boom of the past five years dictates a longer and bloodier workout period.
Likewise, shoddy home-lending practices abounded as never before, amplifying the housing bubble, according to Gundlach. Property values were inflated by bogus appraisals. Borrowers were allowed to qualify for mortgages far beyond their financial means. Income and assets were rarely verified, particularly in the subprime lending market. New mortgages were confected, allowing borrowers to keep their monthly payments low by either repaying just interest or, in the case of the option-adjusted rate mortgage, not even having to cover the full interest payment in the loan’s early years. Gundlach contemptuously labels such loose lending ploys as "shoe-horn financing."
Likewise, special fixed "teaser" rates in the first two to three years of the mortgage also kept monthly payments low before rates began to adjust upward for the remaining life of the mortgage. One could always refinance every couple of years to stay at the lower teaser rates and avoid the lash of high fully indexed rates. But now that game is likely over, says Gundlach. Teaser rates have moved sharply higher since the Fed tightening that’s raised the fed-funds rate to 5.25%. Gundlach expects lenders to become timorous, especially with home appraisal values likely to fall."
Housing’s Woes May Be in Early Innings
JONATHAN R. LAING
Barron’s, December 4, 2006
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