In his latest monthly essay, Pimco bond manager Bill Gross re-iterates his view that the US economy is driven by asset price appreciation, and when house prices stop rising consumer spending and thus economic growth will take a hit. But what makes this month's essay exceptional is the precision with which Mr Gross is prepared to predict the timing of the end of house price appreciation: about now. Key quotes below:
1) Housing prices will cool/stop going up very much/even go down in some cities, WHEN...
a. Interest rates rise to a high enough level to make the purchase of a new home a burden instead of a boon for first time buyers.
b. Mild regulatory pressure begins to reduce the amount of funny-money lending.
c. Speculators sniff the beginning of the end.
2) Home equitization should retreat shortly thereafter.
3) Consumption/the U.S. economy will then weaken when the house ATM starts running out of fresh new $25,000/$50,000/$100,000 home equity loan dollar bills.
4) The Fed will cut interest rates in order to start the game all over again.
Let me state categorically that the above sequence is barely questionable, almost inevitable, 99% unavoidable, and in modern parlance - “slam-dunk.