Another Economics Lesson from Bill Gross

Also included in the October Investment Outlook from Bill Gross is this graph of how much equity people have been sucking out of their homes in recent years as a percentage of disposable income. The spending of this money is what has kept to economy chugging along. If home values stop going up and mortgage rates edge up, there will be fewer and fewer refinancings and less available cash for consumers to pump into the economy. The result could range from ugly to tolerable, says Gross:

The froth in the U.S. housing market is about to lose its effervescence; the bubble is about to become less bubbly. If real housing prices decline in the U.S. in 2006 or 2007, a recession is nearly inevitable. If higher yields simply slow the pace of appreciation to a more rational single digit number, then we could escape with a 1-2% GDP economy. In either case, however, our Fed with its new Chairman will likely be in the enviable position of lowering rates come mid-year 2006.

Which will start to make buying a house look better again, right?
Investment Outlook October 2005 [PIMCO]