Monday, January 15, 2007

Housing slump hits hard across the pond

US housing bust getting worse, warns Goldman

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". 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 7pc to 4pc of GDP over the last year, and is likely to halve again in 2007. Mortgage equity withdrawal will fall from 13pc of "discretionary household cash flow" in 2006 to 7pc this year, causing spending power to contract for the first time since the dotcom bust.

Posted by drewster @ 05:27 PM (2694 views)
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5 thoughts on “Housing slump hits hard across the pond

  • So let me get this straight, the American consumer has shown no control with low interest rates, so the answer is to cut rates?

    The savings rate is the lowest ever, so the answer is to cut rates?

    Does anyone else see this as somewhat strange?

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  • Can the Fed cut interest rates without sending the dollar into freefall? Surely a devalued dollar would result in higher oil and gas prices for the U.S. consumer if OPEC ditches the dollar for the euro.Who wants to be paid in a currency declining in value?

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  • Slashing rates 3 times should revive the housing market nicely. If there is a correction in the UK I think rates will have to drop here as well because consumer spending will plummet. There is no way rates could go much higher than they are now without the economy going into reverse which is just as negative an outcome as inflation. However, a couple more rises may see a much more blunted and calm version of what has happened in the USA and require some rate cuts (although unlikely to be 3).

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  • tyrellcorporation says:

    The economy seems to now behave like a kangarooing car – either stopped or rapidly accelerating. Housing has to be made less attractive to investors somehow because this constant lurching from boom to the start of a bust is down to an over-inflated market being kept alive by speculators and the supply of cheap credit. Trying to balance consumer sentiment by raising and lowering rates in rapid succession is daft IMHO.

    If people only feel good about themselves when their houses are raising 50 quid a day for them to spend at the Audi garage then we’re all doomed as that’s just not sustainable in the long term.

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  • inflation is eating my savings says:

    Goldman, Sachs wish to see cheap money. Their record profits last year stemmed in part from leveraged corporate buyouts. This is a plea from them with the aim of maintaining their profits.

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