Hissing housing bubble.

William H. Gross is chief investment officer at Pacific Investment Management Co. (PIMCO), the world's largest bond-fund manager, with $513 billion in assets. In an interview published in the October 26 Business Week, Gross observed: "Housing is the asset that has kept this economy going. The second-mortgage loans and the like. The homeowner taking advantage of capital gains and withdrawing equity--that's what has kept consumption going. If housing stops, equity withdrawal ceases"--and the consumer economy grinds to a halt.

Indications are rife that the housing market has cooled off and started to contract. Nick Godt, market analyst for The Street, noted on October 27 that the "average price of a new home ... fell to $285,700 in September, from $287,500 in August.... Amid slowing sales, the supply of new homes on the market has risen sharply and is now up 20% year on year." "No wonder price gains are slowing," comments Ian Shepherdson, chief U.S. economist at High Frequency Economics. "Builders have over built and have to cut inventory."

For several years, analysts have warned that the housing and mortgage markets constitute a speculative "bubble" that will be pricked when interest rates begin to climb. Between June 2004 and this November, the Fed has consistently increased interest rates to the "point where real housing prices have peaked over the past 35 years," Gross points out. "Make no mistake about it," he warns, "the froth in the U.S. housing market is about to lose its effervescence; the bubble is about to become less bubbly?'

Tom Barrack, generally considered one of the world's most savvy real estate investors, is more blunt about the housing bubble. "There's too much money chasing too few good deals, with too much debt and too few brains," he told Fortune magazine. "That's why I'm getting out?' Along with the impact of higher interest rates, Barrack cites a steep increase in the price of building materials and labor, with construction costs spiking 30 percent in the past nine months. "It's the busted deals caused by construction costs that will cause a [downturn] in the market," he concludes.