The Federal Reserves actions in the coming months will be directly tied to the real estate market, and how much the housing bubble deflates in the coming months. Such huge sums have been coming out of the real estate market through home equity loans (600 billion in 2005) that when that well dries up, disposable income may take a significant hit.
After an 18-month campaign of interest rate rises from the Federal Reserve, economists are pretty sure they can scent a slowdown in housing.
What they disagree about is how much of a drag housing will exert on the rest of the U.S. economy — and whether it will be dramatic enough to eventually trigger a turn-around in Fed policy and a series of cuts in official interest rates.
For five years, double-digit gains in home prices have fueled consumer spending as homeowners cashed out equity. In 2005 alone, home equity extraction totaled some $600 billion, and some analysts see that slowing to $425 billion this year — enough to slice economic growth below trend.
Signs are mounting that the housing market is poised to cool: sales of new homes fell 11.3 percent in November, the largest drop in nearly 12 years, and sales of existing homes fell 1.7 percent while the backlog of homes for sale rose.via Reuters.com.
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