Wednesday, January 17, 2007

U.S. housing as a linch-pin

The Telegraph

The US Federal Reserve will need to slash interest rates three times this year as the housing slump goes from bad to worse and the American consumer begins to buckle, Goldman Sachs has warned. ‘Americans have shown a complete lack of self-control. The personal savings rate is at its lowest point ever, and has actually been negative since April 2005.’”
“‘We believe that housing will soon become the proverbial ’straw that breaks the camel’s back’,’ said David Kostin, the investment bank’s US strategist.”
“Goldman Sachs said homeowners had treated windfall gains from rising house prices as if they were ‘recurring income,’ using home equity withdrawls to subsidize over-stretched lifestyles. This artificial boost to spending has already dropped from 7% to 4% of GDP over the last year, and is likely to halve again in 2007.”
I've said it before; housing has been a key to U.S. domestic spending. As recently as August 2006 I was ridiculed for my views that Americans viewed their rising home values as something akin to an ATM machine, thereby liberating copious quantities of cash from equity to spend on stuff. Stuff not only made in the U.S.A. but in China and other countries as well.

As much as 70% of the U.S. economy is domestic spending, spending that I believe stopped around October 06 as the reality of the housing market started to sink in. Around that time people started to find themselves with no more rising equity or even upside-down under second or third mortgages, owing more than their properties were worth. A sure fire way to end a party if there ever was one.

The news now is beginning to reflect my opinion but has not yet addressed the ripple effect this is bound to have on the global economy. I predict the news will get even worse as we reach the middle of February and by Spring 07 when the housing rebound fails to materialize the news is bound to shift to how it affects the global economy.


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