Slow Housing Market Fuels Stocks And Bonds
(After more than a half decade of unparalleled inflation in prices and profit, the housing market has been slowing down to correct itself since the beginning of this year.)
The cooling market has been negatively affecting real estate investors and the general status of the economy. But recent news indicates that the slowing market may actually end up igniting the rebirth of many stocks and bonds.
The Wall Street Journal columnist, Michael Hudson, explains this positive outlook on the “bad” housing market, in his September 26, 2006 article, “In a Turnaround, Slowing Economy Spurs Bond Rally.”
“In one of the bigger surprises in financial markets this year, a growing sense that the economy is slowing and inflation receding is fueling a rally in the nation's bond markets, pushing Treasury-bond yields to their lowest levels in months.”
The “rally,” which began 10 weeks ago, has gained even more momentum in the past couple of days and may help contribute to a positively-charged future for stocks and bonds.
Some industry experts have doubts about the longevity of this “rally,” but if it continues, lower interest rates could help sustain stock prices, thus making it easier for investors to make potentially risky bets with borrowed money. This would ultimately help accept the affects of a weaker economy and a cooling housing market.
Now, as the economy has been viewed and interpreted as being “bad,” investors are focusing their attention back to bonds, which is pushing yields back down, essentially making it cheaper to borrow money.
“In June, a Wall Street Journal survey of 56 private economists showed that all but 13 expected bond yields to finish the year above 5%. Late yesterday afternoon, however, the yield on the 10-year Treasury note hit 4.55%, its lowest level since February and a large drop from 5.25% in late June.”
As a result, many investors believe that either the Fed will begin cutting short-term rates in response to a weakening economy and low inflation, or the economy will start begin regaining strength.
The longer the housing market and economy cools, investors will keep buying Treasury notes and bonds to push their yield even lower, because they believe that inflation is no longer a concern.
“The latest dose of bad news on housing came from the National Association of Realtors, which said yesterday that sales of existing homes dropped for the fifth straight month in August and that the median price of all homes sold last month declined 1.7% from a year earlier, the first year-to-year decline in more than 11 years.”
“‘People are searching for safety,’ said Mark Kiesel, a corporate-bond portfolio manager at Pacific Investment Management Co., or Pimco. ‘I think the story of this [past three months] has basically been the hard landing in housing. That's become apparent to investors, and led to a rally in the bond market as people have realized slow growth is very likely.’”
“The rally's impact could be significant. Perhaps most important, by helping to lower mortgage costs, the decline in bond yields could help buoy home sales and prices at a time when they are under growing downward pressure. The 10-year Treasury note is a benchmark for long-term mortgage quote.”
However, without another rate cut from the Federal Reserve, bond yields will not be able to hold out for much longer.
