Jim Young/Reuters
- Soaring mortgage rates could be bad news for the economy, Bill Gross tells Insider.
- Steeper borrowing costs will curb home construction, a leading economic indicator, he says.
- Inflation may cool but growth might falter, according to the billionaire investor called the "Bond King."
The housing market is grinding to a halt as borrowing costs soar, paving the way for a broader economic downturn, Bill Gross said.
"Potential homeowners' monthly payments on a new home are now three times what they were two years ago," the billionaire investor known as the "Bond King" told Insider in an email.
"Clearly that slows and nearly shuts down new construction," Gross continued. "Housing starts almost always lead the economy by three to six months. We may be nearing a turn in growth prospects for GDP and an easing of inflationary pressures."
Inflation spiked to 40-year highs in 2022, spurring the Federal Reserve to raise interest rates from almost zero to above 5% during the last 18 months. The hikes have caused 30-year mortgage rates to soar from below 3% in late 2021 to about 7.7% — their highest level in more than 20 years.
Higher borrowing costs have sparked an affordability crisis and tanked transaction volumes, but house prices have stayed afloat. A key reason is a supply shortage, as many homeowners have locked in cheap mortgages rates and are loath to lose them by selling.
Meanwhile, buyers are balking at paying top dollar for their next home and taking on painfully expensive mortgages, which has depressed demand and stopped prices from jumping.
Gross expected high mortgage rates to temper demand for new home construction – a leading indicator for the wider economy. As a result, he predicted that growth would slow and inflation would cool.
The Wall Street legend, best known for cofounding Pimco and running the fixed-income titan's flagship bond fund, hinted at his concerns about mortgages and homebuilding in a post on X this week: "30 yr mtge at 7.7%. This shuts down housing mkt."
Gross flagged challenges for other parts of the market in his latest investment outlook, published Wednesday.
"Unless Chair Powell and company can significantly lower real 10 year Treasury rates from 2.25%, investors may eventually realize that bonds are a better deal than clearly overvalued stocks headed into an economic slowdown/recession," he said.