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Wednesday, September 20, 2006

More On Housing, Economy & Fed

By Yaser Anwar, CSC of Equity Investment Ideas

Forbes has an interesting article warning that the housing bust will soon wreak havoc on the overall economy.

The key reason worrying the Fed chairman Ben Bernanke is: the link between the economic slowdown to the end of the housing refinance market. Rates for refinancing mortgages are dramatically up – and the US will no longer benefit from this massive consumer stimulus.
This is not new. Today's housing starts told us that buyers are few, median prices are down in a number of markets and homebuilders stocks are close to a bottom. The housing stocks could rally today if the Fed signals the end of rate hikes or does not give the market its usual cautious inflationary rhetoric.

Forbes magazine said that, "Even if home prices stabilize, the ultimate effect on the economy could be nasty.” Quite similar to what I mentioned yesterday, "Even if the Fed signals a stop this week and bond yields stabilize, the interest burden for US consumers will continue to rise sharply as ARMs and other short-term loans are rolled over at higher interest rates."
That’s because, the pessimistic view holds, homeowners who had been borrowing against rising real estate prices will stop doing so, and that could crimp consumer spending, which accounts for 70% of GDP.

Last year Americans took $678 billion in cash out of their homes through home equity loans, cash-out refinancing and similar instruments, and pumped much of that money into the economy.

“The softening of consumer spending would come on top of already falling spending on residential investment: building new homes or additions to old ones,” Forbes reports.
Jan Hatzius, Goldman Sachs chief U.S. economist, believes a drying up of home equity money over the next several quarters “ould have an effect similar to a cut in wages.
Jan predicts that the Fed will seek to soften the blow by cutting 1.25 percentage points off the fed funds rate next year.

IMO thats a little too much given the economy is expected to grow at around 2.5% or so next year, but we could see a minimum 50 basis point decrease.

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