Bill Gross one of the world's largest bond traders issues a warning on housing:
I think it’s pretty clear that real housing prices have peaked on average four to six quarters after the central bank first raises interest rates and following what appears to be 200 basis points of short-term rate hikes. The tightening then continues (too much exuberance!) another two quarters thereafter for what looks like a total cyclical increase of 300 basis points or so. With the caveat that many countries in this study have housing markets with greater sensitivity to short rates than our own, I find it illuminating that our own Fed has raised policy rates for nearly five quarters now to the tune of 275 basis points, dead on the average point where real housing prices have peaked over the past 35 years.
and
How weak the U.S. economy gets will depend on numerous factors: oil/natural gas prices, China’s continuing growth miracle, and of course the level of U.S. interest rates - themselves a function of the Fed and foreign willingness to buy our Treasury and corporate bonds. But make no mistake about it, the froth in the U.S. housing market is about to lose its effervescence; the bubble is about to become less bubbly. If real housing prices decline in the U.S. in 2006 or 2007, a recession is nearly inevitable. If higher yields simply slow the pace of appreciation to a more rational single digit number, then we could escape with a 1-2% GDP economy.
You might want to read the whole thing.
