Pimco Vs Shilling: The Housing Bull Vs Bear Debate

Tyler Durden's picture

In what was one of the most entertaining and informative live debates on Bloomberg TV since Paul vs Paul, yesterday the news station hosted Pimco's Mark Kiesel in his role as house bull (who supposedly sold his home in 2006 which according to some media makes him a swing-trade expert and top, and thus, bottom-caller) against perpetual skeptic Gary Shilling, who obviously does not share the optimism of PIMCO. His biggest concern? The same as Zero Hedge's - record combined (traditional and shadow) inventory: "We estimate that there are 2 million inventories, both visible and shadow inventories over and above normal working levels. That is a lot. Back in normal times, we built about a million and a half houses a year, so two and a half million is a tremendous overhang. Excess inventories are the mortal enemy of prices." His conclusion - housing has at least another 20% lower to go.

Who is right? We leave it up to readers.

Some highlights:

Kiesel on purchasing a home in California and whether he’s having buyer’s remorse:

“No.  I will say it is a little chaotic because there are a lot of boxes around. I think after renting for six years, my view is that housing prices have fallen about 35% and the inventories are coming down and banks are starting to lend again gradually. U.S. housing looks very cheap relative to international housing.  I feel good about putting some money into housing right now.”

Shilling on why housing prices will decline 20% this year:

“Because of excess inventories. We estimate that there are 2 million inventories, both visible and shadow inventories over and above normal working levels. That is a lot. Back in normal times, we built about a million and a half houses a year, so two and a half million is a tremendous overhang. Excess inventories are the mortal enemy of prices. What may happen here is that now that the robo signing flap is settled and the big banks settled for $25 billion with the various state attorneys general and the federal government, they have been holding off on foreclosures because they had enough bad PR. Now they have settled that, I think they will go back to foreclosures. The National Association of Realtors says that when foreclosed houses are sold, they sell at a discount of 19% to existing houses and that drags everything down when you get a big dumping of these houses on the market. I'm looking for another 20% decline and that is what it would take to bring them back to the long-term averages. They go back to 1890 in terms of median single-family house prices.”

Kiesel on how he factor in those inventory levels:

“Currently, we have 2.5 million homes in existing inventories which is down in the last seven years from 4 million. There is only 144,000 new home sales for sale. That’s at a 49-year low. The existing inventory is at a seven-year low. If you look at the shadow inventory, there were 3.6 million homes that were 90+ days delinquent two years ago. Today, there is only 2.9. All inventories you look at, whether new existing or shadow, they are coming down.”

Shilling’s response:

“They are coming down, but they are still huge…Yeah, they are down, but when you count in the shadow, and particularly this category that the Census Bureau has, which are houses held off the market for other reasons, very descriptive. This includes foreclosed houses that are vacant, but not yet sold. It includes houses that people have listed, but they couldn’t stomach the bids they got so pulled them off the market. You count all of that in and you are still over a working inventory of about 2.5 million.  You are still 2 million above that when you count everything in.”

Kiesel on what number he’s tracking: 

“What I was quoting was the 90+ day delinquencies. If you add that with the foreclosures, you do get to the 3.9 level. The thing about housing is that it’s very much a regional market. The homes that your viewers and people actually would want to buy, you need to look at the existing inventory that is quality. Go out and look for a house now. There is less quality inventory on the market today than a year ago. That shadow inventory will get absorbed quicker than you think because the implied rental yields is roughly 5%-12% in a lot of markets, so investors will line up. Gary, I respect your work and I read your books and if housing goes down 20%, I will back up the truck and likely PIMCO will, too.”

Shilling’s response:

“That's right. At that point the percentage underwater of mortgages would go from now 23% to our estimate is 40%. The equity of people who have mortgages which has come from almost 50% in the early eighties to 17% would go down to about 7%. Virtually nobody with a mortgage would have any equity. What that would do to consumer spending to say nothing to mortgages and mortgage-backed securities derivatives, that is pretty heavy duty stuff. That is recessionary kinds of things. We think that will happen over the next three-four years, one way or the other.”

Kiesel on whether employment levels are at a stage at which consumers are feeling confident enough to make an investment in buying a home:

“If you look at it, we have added 2 million jobs in the private sector over the last year. Confidence is picking up. The U.S. economy is doing well in numerous states and sectors like energy pipelines, technology, autos, manufacturing. There are many areas in the country where there is a housing shortage. The shadow inventory and the amount of homes underwater, there are 11 million homes but it is concentrated really in three states:  Arizona, 61%, Florida, 45%. Yes, there are some weak areas, but the fact is that in certain areas, housing is picking up and prices are going up and so again, it’s very regional.”

Shilling’s response:

“You and I can remember almost a decade ago as this problem was developing and we were on top of it and you were too, that people initially said, the problem was only in subprime mortgages and those are loans that luckily people will never have to meet. Then, they said it is only in Arizona and Florida and Phoenix. Then as it expanded, they said it is bicoastal, don’t worry. Everyone else is safe. Tip O’Neill said that all politics is local and you can say the same thing about real estate. Somehow, the composite, the national numbers are made up of those local pieces. There are a lot of shortages here or the other place. That I think is begging the question, overall, there is still a tremendous excess inventory.”

Kiesel on whether he’ll lower his assumptions about the economy:

“We are looking at basically 1-1.5% real GDP, but you don't necessarily need superfast GDP to get housing to recover.  Housing again is down 35%. The inventories are coming down. We are gradually employing more people. Housing relative to other asset classes—equities, bonds—looks attractive.”

Shilling on the New York-area housing market and whether Wall Street money not being what it used to be has affected real estate:

“I think it very much does. If you look at what is happening to the stock markets and related securities in the last month--if this continues, I think we will see a lot of softness in Manhattan and in the Hamptons and other places influenced by that. If you read off the employment verses GDP curve, if you're looking at even 2% real GDP growth, that says that the unemployment rate would chronically rise about 1% point a year.”

Kiesel on the West Coast housing market:

“Housing is very much based on jobs, based on consumer confidence. We were in the subprime capital of the world in parts of Orange County and we can show you houses that are down 50-60%. In my neighborhood, housing prices fell 20-30% from the peak. The economy is not a recession, we are growing, and banks are flush with cash willing to lend gradually and the Fed is set to reflate. The key here is that you want to own a hard asset in a world of very low to negative real interest rates where the Fed is going to print money.  You have to own something tangible.”

Kiesel on the opportunity cost of buying a home:

“I think stocks are looking at basically nominal GDP, which is 4% plus dividends of maybe 2, so you are looking at 6. There are rental yields in housing out there above that. Plus, you get the benefit of actually living in the house. From my perspective, I still think that housing beats a lot of asset classes.”

Kiesel on whether PIMCO is looking at housing as an alternative to bonds:

“We own non agency mortgages and those securities benefit from a housing recovery. If Gary is right and we do see housing prices go down 20%, the U.S. will be one of the cheapest housing markets in the world. It is already near one of the cheapest.”

Shilling’s response:

“Actually, it would take a 22% decline in median single-family house prices to bring them back to the long-term trend that Bob Schiller has identified going back to 1890. That has been corrected for CPI, general inflation, and for the tendency for houses to get bigger over time. That would bring them back to the norm. They might seem cheap but there are only where they would have been for over a century.”

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CPL's picture

Man PIMCO is a shit tier company.  Couldn't pick their nose with instructions.

Careless Whisper's picture

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Popo's picture

The housing issue is one of demographics.  The percentage of housing (as a percentage of aggregate value) which is held by soon-to-be-retiring (and soon-to-be-dead) baby-boomers is astounding.

The tidal wave of properties which will be returning to market as baby-boomers attempt to extract the value of their nest-eggs is going to be historically epic.

Housing prices are going to get nothing short of pummelled.

Combine that with rising structural unemployment and a (market-forced) rise in credit-quality -- and there's simply no hope for anyone long real-estate.  

The grim reaper is coming.


Furthermore,  to own a home is to be a 21st century serf from a tax perspective.   You are "bound to the land".   Home owners are muppets for predatory tax-regimes,  and with the gross underfunding of municipalities nation-wide,  anyone saddled with a home is a fat, juicy target for tax-fleecing.   How's your home's value going to fare when taxes double?  Triple? Quadruple?  Think it won't happen?  It *is* happening. You're not going to be able to sell it -- especially with the demographic issues mentioned above, at which point you'll be 100% pure American serf.

Stay mobile folks.   Don't own.

redpill's picture

I would offer a counter-argument that as the manipulated and delusional nature of modern financial markets becomes more evident, there will be a scramble for real property that is not subject to the same sort of undulations as increasingly volatile equities.  Valuation +/- 15% year to year in a real asset you can either live in or rent?  Big deal.  Beats massive swings in stock portfolios or negative real returns on bonds, neither of which have any practical value. 

When shit gets real people will buy real estate before they buy gold & silver, that's just how they are.  They are more comfortable with it, they understand it more (or at least they think they do), and at the end of the day it has practical value.  The real estate bubble has already burst, and while there may be some more losses to come in some areas, that's nothing compared to the not-yet-burst bubbles of bonds and central-bank-inflated stock prices. 

And while I abhor debt, if you assume that interest rates will eventually rise, potentially sharply, it would be a massive benefit to savers if they had taken on fixed-rate mortgage debt at these stupid artificially low rates.  That's the way the game is set up.

Foreign property is even more clever, but Americans tend not to do well with understanding unfamiliar things.


Dr. Engali's picture

You put up a sound argument but I think you under estimate the wave of boomers who are going want to downsize. I haven't had a client talk to me yet who isn't giving consideration to down sizing. They all have a big house and they are looking around at it asking themselves...what the hell am I going to do with all this house?

Morrotzo's picture

My whole thing is that the elderly stole and mortgaged away the future of young people ten times over for decades.

Who the fuck are they going to sell to? Wages are down, hours worked are down, unemployment and underemployment of the youth (18-34 demographic) is massive, those young people already have credit card and college debts in the thousands and tens of thousands and hundreds of thousands. The Baby Boomer motherfuckers ate the seed corn. There is nobody left to rip off anymore.

Strangle a Boomer-George Carlin

JeffB's picture

The government is the culprit here.

If they can kill the Fed and free the economy from the governmental strangulation, the economy could heal relatively quickly and even start a long healthy recovery.

There's no inherent reason for "structural unemployment" of the youth etc. There's plenty to be done. We just need to let the economy clear the malinvestment and keep the government from distorting the economy with such disastrous effects.

Sure there are some demographic adjustments that will need to be made, but it's certainly doable. The U.S. population isn't dropping, albeit due to immigration. But we've thrived with a significant immigrant population before, and there's no reason to think innovation and advances in science and technology have suddenly come to an end.


redpill's picture

When they turn around and want to sell it, they'll find they can't get as much for it as they want, and many of them will decide to rent it out and get some rental income from it while they go live in a condo on a golf course.  The tax advantages alone make the situation worth it.  Just like a few years ago when everyone was a real estate speculator, now everyone is going to be a property manager.  The boomers retiring won't be the problem, rather when the "me generation" starts dying off en masse and leaving behind nothing but debt to their kids?  That's a different story.

Popo's picture

Renters are mobile.  Young people are mobile.   They move.  

They don't stick around and pay high rents.    Businesses will also leave when taxes go up.    You simply can't squeeze tax dollars from someone who is mobile like you can someone who's immobile.   (Hell, it's actually pretty hard to opress someone who's completely mobile).   But you *can* squeeze plenty of tax dollars from someone stuck with real estate.

All oppressive regimes depend on limited mobility of subjects.  Serfdom.  Communism.  etc.   Mobility lies at the very heart of personal freedom.  Housing is completely antithetical to personal freedom because it represents the ultimate immobility.  Homeowners are low-hanging fruits for high tax regimes.  Besides, there's no such thing as home ownership in the USA anyway:  You rent from the government.  Stop paying your rent and the landlord will kick you out.  That's not ownership by any definition of the word.  




Meremortal's picture

Mosts young professionals today should rent, as they must stay mobile, and will continue to have to relocate often to chase jobs. I'll rent to you, it all works out. Or, it does if one understands which markets to get into to and which to avoid.

The outlook for those working in the trades is mixed, some will have to move around, others can stay planted. Own/rent ratio for them is still favors renting for now, under my analysis.   

resurger's picture

"interest rates rising sharply" yes when spraed to cover is 0 on US paper auctions which will mark Weimar USA.

the rates shall drop further if there is a second S&P downgrade, i second your thoughts on fixed rate mortgage.






Temporalist's picture

RP I think the reasons people like homes is best put by George Carlin:


graymnzrc's picture

We may also find a European here and there trying to pick up some American Real Estate in order to hide from the coming onslaught over there.

Right now I am looking to buy my eventual retirement home. I hope to rent it out for the next 20 years before moving down. Am I worried? Yes. Do I like the current pricing? not bad. Interest rates? Hell yeah.

I just don't know how bad Europe will sh1t the bed for everyone and how bad things will get over the next 3-4 years. Eventually people have to eat and live so this downturn will end, I just don't know how long before we stabilize.

JeffB's picture

You make some good points, but I don't think this one is as strong as you probably do:

" it would be a massive benefit to savers if they had taken on fixed-rate mortgage debt at these stupid artificially low rates."


Rising interest rates would hammer prices on real estate. Of course it would tend to hurt virtually all asset classes other than perhaps money market funds & cash.

On the other hand, I don't think either of you mentioned the impact of a potential inflationary spiral. That would wipe out a lot of the existing debt one might have invested in a home. Alternatively, it would be a safe haven vs cash for the equity in the home.

I don't think the Fed is about to let rates rise unless absolutely forced to by a painful bout of inflation. The effect of rising rates on housing prices would be counteracted to a greater or lesser extent by the devaluation of the dollar.


bonddude's picture

You may be the smartest person here. You are completely correct. Acquiring property, not triple netted, in the coming tax screw is suicide.

lasvegaspersona's picture


"soon to be dead?" really. The OLDEST boomers are 67 now and are expected to live until what?...78 years old?

Your perverse optimism is leading you astray.

Popo's picture

Take "Soon" to be a relative term.   10 years is "soon" in my book when one talks about a coming financial armageddon.

Besides, think those boomers will die in the homes they currently own?    They won't.   And not because they're going to shuffle off to old-age homes.  

They're going to move because their nest-eggs are their homes.   Their current retirement annuities aren't paying jack-shit because Bernanke has interest rates screwed to the floor.   As a result of Ben's liquidity machinations, the boomers have to sell their homes to pay for their retirements.

This is the Catch-22 that is going to obliterate the Fed's central-planning dreams.   Bernanke is ironically going to force the tsunami of downsizing.  This is where his low-interest rate policy will come crashing in on his head.  He's currently bleeding retirees dry of their retirement funds because annuities are anemic and just about every grandmother in America now knows equities are for suckers.  

Bernanke had hoped to juice equities to counter his low-interest rate policies, but being a naive academic, he completely underestimated the crookedness of Wall Street.  Ultimately, the stimulus of a revved-up equity-market doesn't actually hit Main Street because Wall Street is so adept at fleecing muppets. As a result Mom and Pop will need to sell their house. Ultimately Bernanke's low interest rate "stimulus" will be the sole cause of a historical liquidation in real estate.  There's no other way around it:  Boomers have underfunded retirements because of low rates.   The strategy to support housing is ironically going to be the greatest cause of it's liquidation.  

tawdzilla's picture

Demograophics is the key...80+ million boomers trying to unload their homes to 65 million gen xers.

Also, what happens to home prices when down payments go back to historical levels of 20%?  What happens to home prices when interest rates move up?  What happens to home prices if/when Fannie/Freddie/FHA get neutered? What happens if/when Simpson/Bowles is finally enacted and the mortgage deduction goes away?

This dead cat bounce in housing is a temporary phenomenon...the perfect time to sell if you haven't done so already. 



trgfunds's picture

I see we have four PIMCO fans in the house. (golf clap)

l1b3rty's picture

New York is selling 90 million dollars for record high prices! Woohoo! Party like its '29!


LongSoupLine's picture

Yeah, buy now because Gross is holding all those MBS's?

resurger's picture

PIMCO is going kevin spaceys way: sell that shit to your grandma if she's buying, is she?

LawsofPhysics's picture

LMFAO!!!  Wages?  Anyone want to talk about wages? I didn't think so.  FAIL.

mayhem_korner's picture




Negative real interest rates + flat to declining nominal wages + need to buy life-supporting staple goods = no ability to service debt = deflation of housing prices

hedgeless_horseman's picture



“Virtually nobody with a mortgage would have any equity. What that would do to consumer spending to say nothing to mortgages and mortgage-backed securities derivatives, that is pretty heavy duty stuff. That is recessionary kinds of things. We think that will happen over the next three-four years, one way or the other.”

Help us Obi-Ben-Bernanke...you're our only hope.  Inflate away our mortgage debt.  Increase our nominal home values.  Screw Ol' Grandpa Yoda and his savings...he's going to die anyway.  What imports we will no longer be able to afford we can just take using The (Air) Force...it is the Jedi way.  Republican Credits will be enough, we just need to print more of them!



CvlDobd's picture

I have been considering writing a book on all the hidden costs of home ownership. Even in the good times it nets out for shit. Besides, you never own your home. Stop paying property taxes for a year and then tell me you own your home.

Rentier's picture

Why you need a home based business so you can write off everything under the sun for your house.

CvlDobd's picture

Good point.

You still don't "own" the house though.

And if my experiences with the IRS are typical of 2012 America. Liberal business deductions are soon to be extinct.

Rentier's picture

Sure you do, when you retire you'll still be paying rent.  Which you can't write off.  I won't my house is paid for. As, for taxes I won't be paying those.  How?  Because I have renters like you that will be paying all my bills like utilites and taxes via your rent checks to me.  Plus, I get to write off my property taxes on my home based business. 


CvlDobd's picture

Your points are well taken although I must say we are comparing apples and oranges. My point is on a family of four owning one house to live in, not a home based business or a rental property. Just maintenance on my house each month is similar to a new motorcycle payment. Just interest is about the same as a one bedroom apartment each month.

My "own" comment is centered on property taxes. Truth of the matter is the government owns all the land. They just let us peons use it for a while as long as we pay our ridiculous taxes.

Rentier's picture

I concur without a home business owning a house can be losing proposition in the end. 

One way can avoid property taxes is if you are related or know disabled vet you can trust. lol.  Now another way my parents told govt to kiss off on property taxes is they sold their house and bought a large sail boat and had it parked in intercostal or at friend's dock, zero property taxes there >:)

CvlDobd's picture


Now we are talking the same language!

When I tell people not to own, I don't automatically mean rent. I mean get creative! Boats, airstreams, lofts, etc. there are ways to outsmart traditional living expenses so that people can focus more on what truly makes them happy. I get no joy out I cleaning gutters. I do get joy ou o riding motorcycles so if I can reduce my gutter expense I can increase the amount I allocate to happiness, like motorcycle trips with friends.

FreeNewEnergy's picture

The home business angle is solid. I've advised people for years to start a home business, even better if you lose money. Plus, my experience with the IRS is that if you don't go too far out of bounds on expenses, they don't care. Also, file by paper. I think they just shitcan paper returns these days and hardly bother to look at them.

Basically, make it as difficult for them to conjure up a reason for an audit. Even then, you can always tell them to go piss up a rope. With the condition the US is in, they simply can't catch all the tax cheats, prosecute all the cases.

Ads for property taxes, yeah, they suck, and I live in NY state, where they're downright punitive. I've been tempted to start a business getting assessments lowered on fresh appraisals after I had mine reduced from 124K to 82K. Cut my taxes by a huge amount. Of course, the assessor came by for a look see and it only took him 3 minutes to decide my reduction was for real (Keep your house in disrepair). Naturally, they want you to get permits for any improvements so they can tax you more, so, if you improve, don't get a permit. It's the most ass-backward law on the books.

Only way out of property taxes is become a church or other non-profit, educational or philanthropic entity, though that's tough to pull off. The current issue of Business Week has a good article about a secessionist in Australia that founded his own nation. Some ideas there!

I think Shilling is on the right track. 20% more on the downside over the next 3-4 years is only 5-7% a year. Child's play. And that gets us only to the norm. Scary to think it could be worse.

Free houses for everyone!

CvlDobd's picture

Great post.

You point about keeping your home in disrepair helps my point. To beat the government (or lose less) you have to keep your house in disrepair? Is that really winning?

When I was in college I worked in a welding shop. We were contracted to renovate the interior metal work. The guy put a dumpster in the last room to be renovated along with most material. That was to avoid a permit as no one coul tell from outside that the house was being renovated. I applauded his creativity, but having to go to such lengths to avoid government flys in the face of my libertarian outlook.

What kinds of home businesses do you recommend? I also love your paper filing idea. Good call.

prodigious_idea's picture

Of course you're paying the taxes.  You just have rental income to offset expenses.  And we renters are glad to have your crew mow the lawn, fix the roof, put in new carpet and paint and replace the appliances.  Was a homeowner for 30 years but after the kids moved out and we got over the emotional attachment to home ownership it was a no-brainer.  Run the numbers with some sensitivity for decline in asset value and your P&L is a nightmare.  Even without a figure for decline in asset value and you're barely above break-even on cash flow.  And of course the situation depends on the locale.

prodigious_idea's picture

Great idea but don't get too excited.  Depreciation is over 30 years and you have to allocate the personal/business portion which turns out to be almost nothing each year.  Even if you add in pro-rata taxes, R&M and utilities it doesn't make for much of a deduction.  Run the numbers.

HedgeOn's picture

why does everyone quote that schmuck robert kiyosaki "rich dad poor dad"  about not paying taxes on their home as if they came up with the idea themselves?  so pay rent for the rest of your life.  there isn't one way to skin a cat- the people who pay off their houses, pay real estate taxes, ho insurance, and the upkeep of their homes.  renting is not a picnic either... so what, should we live in a hot air balloon?

Dr. Engali's picture

I live in a pretty nice neighborhood and thought about selling over the winter. At that time there was only one house up for sale in the development. When spring rolled around for sale signs started popping up everywhere.  Now there are twelve houses listed and I know of two more going up. Needles to say I decided against selling.

HaroldWang's picture

Me thinks we're going to erase bulk of these losses on the BTFD after Euro close. Today feels like that old game is back in play.

guinea's picture

When is boomers retiring going to knock down housing prices some more?  or white flight from California?

GeezerGeek's picture

Falling housing prices due to boomers retiring and selling will occur after the adult kids living in the basement are kicked out. That action, of course, will drive rental prices up first, so watch for that to happen.

And don't get caught up in the "live on a boat" meme. If cities find they need revenue, they can find some way to raise slip fees, boat license fees, etc. Then the EPA will come after you to verify that your waste water is not causing polution, and on and on. I've had friends with boats large enough to live on. Maintenance on a boat is not cheap.



mayhem_korner's picture



"Confidence is picking up..."

"We are looking at 1-1.5% real GDP growth..."

"All inventories you look at, whether new existing or shadow, they are coming down...”

"Banks are flush with cash and willing to lend..."

"I still believe housing beats a lot of asset classes..."

This Keisel guy is employed, right?

Calidreaming's picture

Rick Santelli for president

RoadKill's picture

I'm in the process of buying 2 condos in Miami.  Prices are up at least 10% since I signed.

Housing is local has never been more true.  Miami is being driven by massive amounts of money coming from South America - trying to escape the commies in Venezuela, Ecuador, Argentina and Bolivia.  This is only helping the mid-to-high-end condo market.  It doesn't hurt that $/sq ft has fallen 65% from near $1,000 to closer to $300.  I can get into the 4 Seasons for $500 a sq ft vs $2,000 in Boston and $5,000 for Manhattan.

But suburban Miami single family homes will remain a disaster.  These forclosed houses are quickly becoming uninhabitable.  Soon you won't be able to even fix them.  You'll just sell them for the land and tgear them down.

francis_sawyer's picture

Have fun with shoddy construction & inability to get insurance protection from hurricanes...