How will the upcoming housing bust affect the economy?

Goldman Sachs is pessimistic:

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 7pc to 4pc of GDP over the last year, and is likely to halve again in 2007.

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.

Commenting on the article, MA writes:

I treat my place as though I were buying a car… just need to pay it off.

At current prices, buying a house is like buying a car - a Lamborghini, except you're actually getting a Honda Accord, despite paying premium prices. The reason these people are having to do home equity loans is because they've exercised no discipline - not in their consumption of luxury goods, but in their consumption of homes. Home prices are the reason for this debt. Buying overpriced homes is included in consumption, not in savings. And the mortgage payment is probably the biggest item in any homeowner's budget. Which is why I believe consumption will hold up and savings will increase as home prices collapse. Consumers will no longer chase overpriced homes and the exorbitant interest payments (at these home price levels, don't think of a mortgage payment as an investment - it's simply an oversized credit card bill) that come with them.