Worst Bond Returns Since 1997

Bloomberg News reports the following:

The U.S. housing industry, which has accounted for about half the economy's expansion since 2001, is becoming perilous for bond investors.

Anyone who bought the debt of D.R. Horton Inc. or Toll Brothers Inc. in June, when new home sales set a record, has lost more than 6 percent in a tailspin that may be far from over.

The combination of rising interest rates and record-high home prices means that it's the most difficult time to buy a home since 1991, according to the National Association of Realtors. The Washington-based trade group said last week that home sales and prices probably peaked during the third quarter.

``Everyone believes the home-building business is about to roll over and start a downhill slide,'' Steven Bohlin, who oversees $4 billion of bonds at Thornburg Investment Management in Santa Fe, New Mexico, said Nov. 15. Bohlin said he recently sold the debt of Fort Worth, Texas-based D.R. Horton, the largest U.S. homebuilder.

How the $64 billion market for real estate bonds went from boom to bust in a few months shows that the Federal Reserve's 3 percentage points of interest rate increases since June 2004 may finally be having an impact on borrowing costs.

The average 30-year mortgage rate reached 6.37 percent last week, up from the low this year of 5.53 percent in July and the highest since April 2004. The Fed increases mean that payments by consumers who took out adjustable-rate mortgages in the last few years will rise by $80 billion next year and $1 trillion in 2007, according to estimates by Deutsche Bank AG.

Find the rest of the story at this link.

— The Boy in the Big Housing Bubble