Wimpey (George) - The UKs Leading Housebuilder

Pimco's opinion deserves respect. I have a problem with the comments however because I think that if housing sales slow down, long term Treasury yields will fall which in turn will support housing sales - i.e. there is a self correcting mechanism built in. Anyway, McCulley emphasises a slowdown in existing home sales.

Pimco director Paul McCulley sees housing, spending slowdowns in 2006
19 December 2005
The Canadian Press

NEW YORK (AP) _ A sharp decline in new and existing U.S. home sales in 2006 will force "a serious slowdown" in consumer spending that will reverberate throughout the global economy, Pimco's managing director said Monday.

While he did not forecast a recession in the year ahead, Pimco's Paul McCulley said the rapid appreciation of U.S. home prices in recent years will finally outrun consumers' ability to pay.

The result will be slower sales and fewer Americans tapping the equity in their homes to finance spending, known as mortgage equity withdrawal, or MEW, as McCulley calls it.

"Both volumes in total homes sales, particularly existing home sales, and MEW are set to fall sharply in the year ahead," McCulley writes in a research note called MEW Drag, dated December 2005. "Not the stuff of recession, I hasten to add, but clearly the stuff of a serious slowdown in consumer spending."

A move in short-term interest rates from one per cent in mid-2004, when the Federal Reserve began tightening monetary policy, to the current 4.25 per cent level has finally "put the half nelson on the ability of the mortgage industry to price" so-called affordability mortgages such as interest-only and adjustable-rate loans, McCulley said.

That could hit spending hard in California, he added, where 80 per cent of new mortgages are affordability products.

And since overseas economies rely heavily on the United States' seemingly unquenchable thirst to spend, a slowdown will affect growth elsewhere.

That will make it necessary at some point for the Fed to begin easing monetary policy.

"Not on the immediate horizon, certainly, but a year from now, that's what we are going to be talking about," McCulley wrote.

Declines in home prices have been reported recently in some of the hottest U.S. markets, while the National Association of Home Builders reported Monday its index for sales of new homes slipped to 57 in December, its lowest level since April 2003. The index stood at 60 in November.

Newport Beach, Calif.-based Pimco has some $500 billion US in assets under management.