How would Fed rate cuts in response to slower economic growth affect the housing market and refinancings?
Simon: The Fed had a difficult time getting the housing market to slow—the record quarter for housing price appreciation came 18 months after the Fed started tightening—and we think that will be the case on the flip-side as well. Fed rate cuts are probably not going to provide a lot of relief for the housing market in the short term. We also don’t expect a big refinancing wave unless the Fed really cuts rates a lot. As the economy slows, and the Fed shifts toward rate cuts, short-term rates should fall more than long-term rates. Right now, you can get a 30-year mortgage for about 6.3% while an adjustable-rate mortgage is about 7.5%. So, if 30-year rates don’t really drop, it will take a lot of Fed rate cuts to get short-term adjustable rates down to levels that would prompt refinancing. Q: PIMCO has traditionally overweighted mortgage-backed securities in its portfolios. How has the firm’s view on housing influenced that strategy? Simon: The bulk of our mortgage-backed assets are reall
