.... and [interest rates] landed in a valley so low that the lure of assuming a mortgage became irresistible. Houses were then turned into ATM machines as refinancing, equity extraction, and a plethora of funny money mortgage innovations placed cash in the hands of consumers. The U.S. and global economic recovery over the past four years, as detailed in previous Outlooks, has thus been asset-based with housing leading the pack. Central banks worldwide, through both historically low real policy rates (Fed Funds) and the recycling of reserves into longer-dated U.S. Treasuries (Bretton Woods II) bear responsibility for much of the froth. Ordinary citizens with a capitalist bent - gettin' while the gettin' is good - must own up to the remainder. Combined, they have produced a growing economy but one which is acutely dependent on housing continuing to go up, equity continuing to be extracted, and consumption continuing to be motivated by what seems to be an endless chain of paper prosperity.

Greenspan states that homeowners borrowed $600 billion last year against the growing equity in their homes made possible by the annual gains in housing prices of near double-digits in recent years. That $600 billion amounts to nearly 7% of disposable personal income. While Greenspan again does not take the risky step of suggesting how much of that flows through to spending, private economists and good old common sense suggest at least 50% and maybe more. People don't borrow money to deposit it in the bank. They borrow money to spend. If so, and using a conservative 50% figure, the chart points out that home equitization has added ½ to 1% annually to the U.S. GDP growth rate in recent years. Should home prices stop going up at recent rates, equity extraction will become more difficult. Studies by Goldman Sachs on other home asset-based economies, such as Australia's, point to retail sales slowdowns of as much as 4% once equitization rolls over. This week's consumer reports from the UK point to the same conclusion.