Bill Gross, who is the head of PIMCO, the largest mutual fund in the world, released a statement to his investors on his website recently, and he touched on several housing-related issues that would likely be interesting to readers of this blog. The article on the whole is pretty entertaining and well-written, so I would go ahead and click through.
Here are the key bullet points, quoted directly from the article:
- Americans now know that housing prices don’t always go up, and that they can in fact go down by 30%–50% in a few short years.
- Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending.
- Private mortgage lenders will demand extraordinary down payments, impeccable credit histories and significantly higher yields than what markets grew used to over the past several decades.
Gross argues that government backing in the mortgage industry is more or less a necessity, because private investors simply will not fill the funding gap. He recommends making Fannie Mae, Freddie Mac, and the other housing agencies into one tightly-regulated giant agency. He advocates for a 50-75 basis point fee on every mortgage loan in order to protect taxpayers from losses.
Probably the most interesting thing he says is that mortgage rates would likely increase “300-400 basis points” in the absence of government support of mortgages. If this is true (and I suspect it is) it shows just how dependent the housing market is on the government. It also shows how reticent private investors are to invest in housing at current yields.
Again, I recommend reading the whole piece. It has some of the most sensible suggestions for fixing housing that I’ve read anywhere.
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