VICIOUS CYCLE

From Calculated Risk

As housing cools down (prices do not need to collapse), mortgage equity withdrawal declines. Then less MEW leads to a slow down in GDP growth and lower imports.

Lower imports might lead to a lower trade deficit, depending on the strength of exports. This could lead to less foreign CB investment in dollar denominated assets. And this could lead to higher interest rates followed by even lower housing prices and the cycle repeats.

The result: a Vicious Cycle with lower housing prices, less consumption leading to higher interest rates.