The Federal Reserve will have to cut interest rates in the second half of this year, partly to correct a housing market that’s overvalued by as much as 20%, bond guru Bill Gross said CNBC’s “Squawk Box.”
“They don’t want to recreate a situation such as they have witnessed in Japan where property declined and you saw an asset bubble popping and producing deflation,” said Gross, chief investment officer and founder of Pimco. “So if we get down to a point where [home] prices are moving in the 5% to 10% negative category, the Fed is going to start to react.”
Prices are already down by 2% to 3% nationally, according to some studies, Gross said.
The disappearance of “innovative financing and funny money mortgages” and studies by Yale economist Robert Shiller suggest the market could be 15% to 20% overvalued at this point, he added.
But “a home is worth whatever anybody is willing to pay for or can afford to pay for it," Gross said. “Home prices are a function of financing costs and the price of the home.”
“If financing costs and the Fed lower interest rates by 50 to 75 basis points, then they support the housing market,” he explained.
So would a rate cut maintain the liquidity that’s in the market and reflate subprime?
No, Gross says, because “the subprimes are not going to be financed like they were.”