Bill Gross: Real Estate is 15-20% Overvalued

Those of you who follow this blog know I am bearish on the US residential real estate market. I wrote a blog post back on March 15th entitled "Is Real Estate A Good Investment." I encourage you to read it if you haven't already. To summarize briefly, I expect a secular bear market in residential real estate over the next 5-10 years. Unlike the stock market which can adjust quickly and dramatically, the real estate market -- due to lack of liquidity, disguised price declines and the ability of sellers to hold out for the right price -- typically unwinds slowly and painfully. Ultimately it is the tightening of credit and an increase in the number of motivated sellers that forces a real estate market down.

One prominent investor whose opinion agrees with mine is bond market sage Bill Gross. His April 2007 Market Commentary, entitled "Grim Reality" concludes that home prices are approximately 15-20% overvalued. For those of you unfamiliar with Bill, he manages one of the largest bond portfolios in the world at PIMCO and has been called "the world's most prominent bond investor" by the New York Times. Bill's market commentary is widely read and studied.

Bill isn't the only sage who has been calling for home price declines. The other gurus in the bear camp include Yale economist Robert Shiller, Jeffrey Gundlach Chief Investment Officer of TCW Group (a firm with almost $100 billion under management), and of course David Tomnitz the CEO of home builder DR Horton (okay, okay Tomnitz isn't a guru, but you gotta love a CEO who tells analysts and investors that 2007 "is going to suck"). I must say this is a formidable bunch, its a wonder David Lareah isn't more intimidated . . . . perhaps he should be.