Forbes 10/2 issue: Housing squeeze. Oh dear god what will consumer junkies do now that the housing ATM is closed?

Man, do I smell a Time Magazine housing bust cover story coming soon... oh, so soon... Here's the upcoming Forbes story as the MSM really pile on now.

I found the prediction that the Fed would cut 1.25% next year interesting, as well as the statement that consumers spend every $ they have - income or housing atm, if it's available they'll spend it, being the consumer whores they are...

Housing Squeeze

Even if the housing numbers get no worse, the economy still may take a big hit. Consumers might run out of home equity to borrow against.

The bad news keeps coming from the home front. Buyers are holding back, enough to send median sales prices down 2% or more in Cleveland and Minneapolis. KB Home recently slashed earnings estimates for the second time since June. Shares of home builders have fallen 40% in the past year. The head of Toll Brothers, a big luxury-home builder, says the downturn is the most troubling, and perplexing, in decades: The economy, after all, is still growing strongly.
Well, at least for the moment.

The question: How much of a blow to the economy will shaky house prices deliver? Right now home prices nationally, even after recently weakening, are still up 10% in the year through June. But even if prices simply move sideways, the effect on the economy could be nasty.

That's because, in the bearish view, all those people who treat their homes like a bank, using money they borrowed against rising home values to buy iPods or take vacations or eat out, will be crimped if values don't keep rising. That could ping the economy hard, given that consumer spending accounts for 70% of gross domestic product.

The softening of consumer spending would come on top of already falling spending on residential investment: building new homes or additions to old ones. A sharp reduction in residential investment, down, say, $100 billion in two years from $800 billion today, could trim three-quarters of a percentage point from GDP growth.

The practice of extracting cash from homes took off only a decade ago. So the Fed is to a large degree sailing in uncharted waters. So are investors whose growth forecasts presume that consumers will keep consuming.