Pimco's Gross: Fed Cuts Are No Help for Housing

The Federal Reserve's aggressive interest-rate cuts have failed to push mortgage rates lower and thus have done little to help the battered U.S. housing market, said Bill Gross, chief investment officer at Pimco, the world's largest bond fund.

AP

The Fed's easing of its benchmark rate by 2.25 percentage points since September to the current 3 percent has not brought mortgage rates lower, with the Fannie Mae 30-year mortgage rate at 5-3/4 percent, Pimco's Gross said in a series of interviews late this week with Reuters.

"There has been no ease in the mortgage market,'' Gross of Pacific Investment Management Co., said in a telephone interview from his headquarters in Newport Beach, Calif. Gross said the housing downturn was still in its early stages.

"If anything, there's been tightening and so to me that's the first inning as opposed to anything else,'' Gross said of where the economy stands in the ongoing housing crisis.

Fears of a U.S. recession have intensified as home prices remain under pressure and are not expected to stabilize until later this year and as financial credit conditions remain tight.

Already, a growing number of economists are no longer debating whether the U.S. is already in recession, but are measuring its severity.

"We are 225 basis points lower and the yield curve is reflecting 275, so that seems like a lot of ease for the markets,'' Gross said. "But here is the startling point -- the markets that Fed policy-makers are trying to affect haven't changed,'' he added.

Gross said Fannie 30-year mortgage rate stands at 5-3/4 percent, which is the same level as in September when the Fed began lowering rates dramatically.

"For the rate to the borrower, you add 50 basis points because that is the fee both of them charge to guarantee and service the loan, so today's rate to the borrower then is at least 6.25 percent on conforming loans,'' he added, referring to Fannie Mae and Freddie Mac, the second largest U.S. mortgage finance company after Fannie.

U.S. house prices have been falling, defaults in the subprime home mortgage market have been rising, and dozens of major U.S. lending operations to less-creditworthy borrowers have gone out of business.

On a national basis, home prices are down roughly 7-8 percent but Gross still expects a 20 percent decline in total.

This week, Mark Zandi, chief economist and co-founder of Moody's Economy.com, said a rapidly deteriorating U.S. economy will cause home prices to drop by 20 percent peak-to-trough.

"A 20 percent decline in housing prices is a serious serious asset deflation,'' said Gross. "People mentally compare it to the stock market where we've had bear markets of 30 or 40 percent in the past -- and the conclusion is that we can survive this.''

He said: "Well, a 20 percent decline in housing prices is much different. It's confidence destabilizing, it's credit imploding and it's very unlike the stock bear-market as the Japanese experience in the 90s and yes the Depression in the 30s would prove.''