Monday, January 15, 2007
Housing slump hits hard across the pond
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.