US house price falls and delinquencies will run further, says Pimco

Pimco has joined a growing list of rivals in saying America’s housing market will fall further, and predicts lenders will foreclose on up to seven million more homeowners by 2015, having done so on two million already.

Pimco portfolio manager Scott Simon’s gloomy outlook echoes that of Alistair Lumsden, the hedge fund manager at London’s CQS, whose prediction of America’s first sub-prime slump made investors nearly 200% during the ensuing crisis.

Lumsden said in May, further house price falls up to 10% were possible.

Pimco’s Simon (pictured) predicted 6% to 8% declines, and said America’s housing market currently “is far easier to break than to fix [and] if policymakers alter the government’s current approach to housing, and unwittingly break [it], they may not be able to repair the damage within the foreseeable future”.

He said the apparent recent price bounce occurred because foreclosures stalled under political and media scrutiny and lawsuits – and therefore fewer of the distressed sales crept into the statistics.

“It was likely a statistical bounce, not a real bounce, and now the housing bulls are back to being bears.”

He expects foreclosures to peak in 2014, but said the numbers could remain high “for a few years after that”.

Housing market troubles now exert a “neutral influence” on the broader economy, in his view, but they already hit sales and construction figures.

Eventually this could result in housing shortages or, in extremis, a housing collapse if prices fall by 15% to 20% from current levels.

Simon said Americans historically maintained repayments so long as they did not do so, but sharper drops triggered “big spikes in delinquencies”. And if falls hit 25% “it could be very ugly”.

He said it was important Washington continue extending credit to home buyers, via publicly-owned agencies, as banks were constricting their credit lines.

Simon described agency lenders Fannie Mae and Freddie Mac as “giant lightning rods [for opprobrium] because they lost so much money”.

But he added the market still relies heavily on them, “and if policymakers err in tinkering with that support while the market is so fragile, the unintended consequences could be extreme”.

He praised these lenders for their activities in prime mortgages, noting their main problems had stemmed from involvement in lesser-quality lending.

David Walker

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