Federal Reserve Has Fueled Housing Rebound, Pimco’s Cudzil SaysJody Shenn and Tom Keene
The Federal Reserve’s debt buying has helped housing both by holding down borrowing costs for home buyers and pushing investors to purchase properties instead of bonds, Pacific Investment Management Co.’s Michael Cudzil said.
“It’s definitely had a positive impact on the housing market,” Cudzil, an executive vice president who specializes in mortgages at Newport Beach, California-based Pimco, said in an interview on Bloomberg Radio with Tom Keene and Michael McKee. Along with helping traditional borrowers, the lower bond yields created by the central bank have “forced money away from center. You’re actually starting to see money moving out of the capital markets and into real estate.”
Blackstone Group LP, the world’s largest private-equity firm, is among institutional investors rushing to buy up homes to rent out, helping prices in 20 large metropolitan areas rise 9 percent through January from March 2012, after falling 35 percent from a 2006 peak, according to an S&P/Case-Shiller index.
Values will rise 8 percent to 12 percent over the next two years, boosted in part by the near-record affordability created by the low mortgage rates the Fed has engineered, Cudzil said.
The central bank started its third round of asset purchases known as quantitative easing in September with $40 billion in monthly buying of mortgage bonds, before also adding $45 billion of Treasuries to the program. Rates on 30-year mortgages averaged 3.41 percent last week, after reaching an all-time low of 3.31 percent in November, according to Freddie Mac surveys.
Pimco, manager of the world’s largest bond fund, expects the Fed to start slowing its debt buying by September, before ending the expansion of its balance sheet early next year, Cudzil said.
Mortgage rates probably won’t experience a sharp jump when the Fed stops buying, increasing only 0.15 percentage point to 0.2 percentage point, he said. Ideally, the private sector will be strong enough to pick up the slack at the time the Fed begins tightening, he said.
“Whether or not that transition can happen remains to be seen,” he said. “The answer is still up in the air.”