AMERICAN CONSUMER LOOKS INTO THE ABYSS

Americans lured to easy credit, short term low interest mortgages which balloon after 6 months, find  man's /woman's home is not their Castle , when the banks come a calling.   Canada's red hot real estate market hype by spun by realtors, No Money Down theories, particularly in Vancouver, one wonder if Banks raise rates a few interest points higher in consumer mortgages will Canadians feel the Fairytale ending, much like the Americans are currently feeling?

Economists say many in Vancouver are house rich, but cash poor.   Today's debt-addicted society has become so used to cheap credit that
any significant rise in interest rates could increase personal
bankruptcies at a pace not seen in five to 10 years, one economist
suggests.

A  raise in a point or two in  mortgage rates will certainly prove them right.

url="http://www.canada.com/nationalpost/financialpost/story.html?id=7a61fd5b-3974-4055-9dbf-4ed6c735a575"]Buckling under soaring debt payments and plunging home equity, how much longer can the 'fabled' U.S. Shopper carry the weight of the economy?;

Jacqueline Thorpe, Financial Post

Published: Saturday, August 25, 2007

He bought 23 million digital TVs, 34 million MP3 players and 127 million wireless communications devices last year. To fund the purchases he cashed out hundreds of billions of dollars in equity from his newly purchased home -- a piece of cake since his house was posting blistering double-digit price gains.

Now his mortgage payments have snapped higher as his teaser rate expires, his house is starting to lose value and some analysts are predicting a double-digit price slump--a deflation the likes of which the United States has not seen since the Great Depression.

Can the fabled U.S. consumer continue to carry the weight of the economy on his shoulders, and by extension the global economy?

Home Equity WithdrawalView Larger Image View Larger Image

Home Equity Withdrawal

Andrew Barr, National Post

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Financial markets have been badly shaken by trouble stemming from the housing slump, but some analysts say the full impact on the underlying U.S. economy has yet to be felt. Add in the recent gut-wrenching volatility in the stock market and the belated tightening in credit standard, the chances of the first consumer-led recession since 1991 is ticking ever higher as consumers move to rebuild their tattered savings.

"We are now in a serious housing recession," said Susan Wachter, professor of real estate at the University of Pennsylvania's Wharton School in Philadelphia. "The increase in wealth that came through refinancing was what took us out of the 2000 recession. The real concern is that we'll go down the same way we came up, which is that housing prices will cause consumers to pull in and stop spending and that will throw us into a recession. But that hasn't happened yet and we won't see whether that happens for another three to six months."

While the recent financial market turmoil has been compared to 1998, when the U.S. Federal Reserve had to slash interest rates to prevent a series of cascading financial accidents from submerging the U.S. economy, there is one key difference this time around: the economy is much weaker.

"I was working at the Bank of Canada in '98 and everybody was forecasting a contagion effect from Asia to the United States, and it did not happen," said Yanick Desnoyers, senior economist at National Bank in Montreal. "Long-term rates went down, mortgage rates went down, the housing sector was boosted by the decrease in rates and consumption just grew stronger. This time around is different. Home sales were running at double-digit in '98, now it's a double-digit negative sign. Inventories of homes are very high, and prices are going down. The consumer mood could turn sour quickly in this kind of environment."

To understand the Herculean task now facing the U.S. consumer, it is important to consider how essential his house was to his pocket book in the past half decade. Home-equity withdrawal doubled to a peak of nearly US$500-billion in 2005 as home prices soared before settling back down to around US$228-billion last year. About half of that chunk of change went toward the purchase of big ticket items.

KAGAN MCLEOD, NATIONAL POST

Since house prices started to slip, consumers have started to see their equity turn into debt -- especially since new-fangled mortgage products allowed them to put less and less down.[/q]