THE BASIS POINT

PIMCO Head Bill Gross: No One Knows Where Housing Bottom Is

 

In an interview with CNBC today, PIMCO chief Bill Gross covered a broad array of economic topics, most notably saying that “no one really knows—the banks, Fannie or Freddie, the Treasury, the Fed, PIMCO—no one really knows where the bottom is for housing.” He said that as prices keep going down it perpetuates a cycle where banks need to keep raising capital, and one result is that interest rates go up.

So he doesn’t believe the Fed will hike rates any time soon because oil and other commodity prices that were driving inflation are moderating:

“I don’t think so,” he said when asked if he foresees a rate hike. “The concerns about inflation have got to be coming down … with oil prices down maybe 25 percent from the peak. Other commodity prices, gosh, gold down 20 percent, silver down 10 percent today alone … Those at the helm, so to speak, have to be observant of what’s happening in the commodities sector, and that’s been the biggest push in terms of inflation for the past six to 12 months.”

He does believe that the government will need to help keep rates low. Gross said that with average mortgage rates in the 7% range, you can’t support a housing market. Higher rates are largely because of Fannie/Freddie bond yields rising relative to Treasury bonds. Gross suggests that the government needs to intervene and buy preferred shares of FNMA/FHLMC (to the tune of $15b each, “at a minimum” that much is needed to shore up their balance sheets to prepare for their losses). This will help keep up confidence in the mortgage bonds they issue, and as more buyers take up these bonds, it pushes yields down.

 

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