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PIMCO seems pretty happy with the US housing market in 2006

PIMCO's McCulley Sees Fed Ending Rate Hikes In Jan - CNBC
27 December 2005
Dow Jones International News

NEW YORK (Dow Jones)--Paul McCulley, managing director at bond giant PIMCO, which has approximately $500 billion in assets under management, said Treasurys' yield levels signal the Federal Reserve's tightening of monetary policy is coming to an end.

In an interview Tuesday with CNBC, McCulley said that compression of yields between the two- and 10-year Treasury notes is "telling you the Fed is essentially finished tightening monetary policy. The Fed may tighten one more time at the end of January" when Alan Greenspan chairs his last Federal Open Market Committee meeting, he said.

Some analysts noted that the two-year note briefly yielded more than the 10-year note on Tuesday - an anomaly known as an inversion - but the difference between the maturities largely held between flat and one basis point during New York trade.

"The yield curve is calling the turn in the Fed cycle," said McCulley. It is "saying the Fed has finished the tightening process and is starting just at the margin to discount the beginning of an easing process looking at 6 to 12 months."

The PIMCO fund manager said that shape of the yield curve also signals a slowing in the U.S. economy, with the housing market the likely driver. The deceleration, however, doesn't have to lead to recession, he added. "We can get a soft landing if the Fed will listen to the message of the yield curve and stop the tightening process."

As for when the Fed would start easing monetary policy, McCulley said it will be "a function of just how quickly and how hard the property market comes off. To throw a wild guess at you, somewhere between Halloween and Thanksgiving."

As for the housing market in 2006, McCulley said he expects home appreciation to slow from the 10-15% range to 5%. But "the big impact is going to be that you're going to see a big slowdown in home equity withdrawal as you see a big slowdown in volumes, particularly of existing home sales," he said.