The WSJ today reports on the ongoing pressure that increasing lending rates are placing on the US consumer who is today more levered than ever before in history. See Mortgage Rate Rise Pushes US Housing:
“The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, according to the National Association of Realtors.
“It's a blood bath,” said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. “We're talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.''
Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week. Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession.”
Comment: as one of the largest bond fund managers in the world, Pacific Investment Management Co (PIMCO) has a vested interest in encouraging rate cuts. If we are into a cycle of systemically higher rates, this will prolong a bear market in bonds after many years of easy gains. But Kiesel's concerns about the negative fall out of the housing recession are not to be easily dismissed. The conundrum for the Fed is how to cut rates to help housing when inflation is above target and the US dollar is already falling. The more the dollar falls the more inflation the US will suffer as their imported goods become more and more expensive to buy. The imbalance of the past few years is now coming back around.