In Bill Gross’ PIMCO Monthy Blog “Investment Outlook” PIMCO he comments that:
…because the U.S. economy has evolved into a highly levered finance-based economy, it stands to our reason that this modern day version is more sensitive to changes in interest rates than those of years past.
As an economy, we are more sensitive to changes in interest rates then in prior rate tightening cycles. “By the time 10-year and 2-year Treasuries reach parity, as is almost the case now, the economy is typically slowing and the Fed is at or near the end of its tightening cycle.”
In other words, the Fed’s strategy of raising short terms rates to reign in the economy to stem inflation may be coming to an end. If you agree with Bill Gross’ assessment, then upon further reflection its not clear whether this is a good thing for the housing market. It suggests a weaker economy which may help temper mortgage rate increases, which housing may be especially vulnerable to, but it also may mean that a weaker economy will not be able to keep pace with rising housing prices because of weaker employment and other factors. The result? A more tepid housing market characterized by flat or modest appreciation and a coooling off of the rate of new development.
I had to get a Halloween reference into this post. 😉
Tags: Ben Bernanke