Former Federal Reserve Chairman Alan Greenspan is "out of his mind" to say
that the housing slump has already bottomed out, a leading financial expert
tells Barron's.
Two months ago Greenspan cited a stabilization in mortgage application rates to
support his view that the housing bust was over.
But Barron's Jonathan Laing reports that Jeffrey Gundlach, chief investment
officer and fixed-income expert at money-management firm TCW Group, told the
respected business publication:
"This is the kind of silly optimism that one would expect from somebody who'd
just passed his real-estate brokerage exam and was hoping to drum up some
business.
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"Greenspan is out of his mind to declare a bottom in the housing market after
just a six-month slide."
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On the contrary, Gundlach predicts that the housing market won't bottom out
until at least 2008, and will see no meaningful recovery until at least 2010.
And due in large part to the housing downturn, he sees about a 60 percent
probability of a recession by the middle of next year.
"Consumers are less likely to spend freely when their biggest asset is getting
drilled," Laing writes in Barron's.
"Nor with home prices stable or falling will as many U.S. consumers be able to
avail themselves of cash-out refinancing to underwrite their lifestyles, says
Gundlach."
Gundlach notes that what he calls "shoe-horn financing" — shoddy home-lending
practices — intensified the housing bubble, with borrowers allowed to qualify
for mortgages that were in fact beyond their financial means.
"Teaser" interest rates in the first two to three years of a mortgage kept
monthly payments low before the rates were adjusted. With those adjusted rates
now climbing, and with the Fed raising interest rates, it's no longer easy to
refinance that adjustable mortgage to stay at a teaser rate, Gundlach points
out.
And Laing notes: "Few know the residential mortgage market as intimately as
Gundlach," who during his two decades at Trust Co. of the West, "chalked up an
enviable record running fixed-income portfolios, particularly for
mortgage-backed securities."
Editor's Notes:
