Although one would expect a recession if housing prices collapse, I do not think that it is an automatic. Yes consumer spending should be lower, and savings and disposable income also lower because of increased payments to ARMS, and HELOC because of higher interest rates, but will the FED allow a serious recession, just a minor one, or try to prevent it all together.
We saw back in 2001 that the FED could significantly impact the economy by lowering interest rates – this is not the only trick in their toolbox. It is likely that in the event of a recession beginning, the FED will begin to ease liquidity by increasing money supply. As long as the US can continue to buy low cost consumer goods from abroad, the economy will keep moving. But how do we pay for the net outflow of dollars to foreign governments. One possible answer is to print money.
As long as interest rates stay ahead of the deflation of the US dollar, the US will be able to finance its growing trade deficit. For a time, this will stave off a “real recession”. The US dollar will lose against foreign currencies, but they are so dependent on the US consumer to keep their own economies going they will fight to prevent a US consumer recession. Thus a serious recession may be avoided. The forecasts of Gloom and Doom for the US economy because of a housing led recession are overstated.
But just to be sure, I am out of the market.
The FED may pull some other rabbit out of their hat and create a new “real estate” like boom. Or maybe in 5 years or so we do real estate again. But the world economies will not allow a real US recession if they can help it.