Bill Gross's Self-Serving Comments on Housing Leading the Recovery

 |  Includes: FMCC, FNMA
by: BlindReason

Bill Gross is out with an observation that larger down payment requirements are making it much harder for housing to "lead us out of recession". The logic of course is that because financing is so much more difficult for housing, it is keeping activity in the sector down and acts as a downward push on housing prices overall.

My reaction is do we really want housing to be the sector that leads us out of recession like it did in the last decade? How about we invest in areas that improve productivity and competitiveness in the economy overall instead? Investments in capital equipment and infrastructure which have been neglected in the United States for the last decade are investments that provide long term returns rather than putting people into a bunch of oversized homes they don't need and can't afford and provide nothing of value to the rest of the economy.

Real estate needs to be healthy, but over investment in this space is responsible for 1 out of every 2 bubbles in U.S. economic history. Are we really looking to repeat our mistakes so quickly? Is Mr. Gross suggesting we raise the statistic to 2 out of 3?

In short, his suggestion is a bit self serving and annoyed me as Bill Gross and Pimco own just a bit of real estate debt.

In the past, I've suggested here that we can't move rashly to disband Fannie (OTCQB:FNMA)/Freddie (OTCQB:FMCC) prematurely because it may induce a huge downward shock to housing prices. I still stand by that, but eventually the country's obsession with excessive real estate investment needs to be toned down a bit. That means moving as much of Fannie/Freddie off the government balance sheet as soon as is practical. Practical is defined as when we start to get very modest price appreciation over a sustained period.

In the mean time however, people should have a stake in any new real estate they buy so we can eventually get off the housing drug. If everyone has just token amounts on real estate, it encourages speculation in an asset that provides no real return to the economy. Building houses sucks up capital but it doesn't provides a lot of jobs or increase productivity elsewhere. That means, most mortgages should have significant money down. No more bailouts for bankers who over-invested in massive amounts of real estate debt which got us into this mess.