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Forbes Columnist/Economic Consultant Says Housing Downturn Will End Twenty-Five Year Borrowing Binge

A. Gary Shilling, President of A. Gary Shilling & Co., sees home prices falling which will create some very unpleasant economic after effects. Shilling says leaping house prices have made consumers feel wealthy so they save less and borrow more.

He doesn’t see high interest rates puncturing the housing balloon. The real threat is that prices will get so high that potential buyers will stand aside and nervous speculators will dump their properties on the market.

Already, he contends, the supply of existing housing for sale is jumping. Along with the anticipated sales dumping, the destruction of housing wealth will end the quarter-century binge of borrowing and spending. This will in turn initiate a consumer saving spree, spreading the pain up the retailing spectrum.

Ultimately, Shilling believes, a severe break in house prices could destroy enough net worth and spawn a big enough financial crisis to shift the good deflation of excess supply to bad deflation of deficient demand.