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By Andrew Willis

Rising U.S. house prices fuelled one of the great economic booms of all time.

Now Goldman Sachs economists are out with a report that predicts a two-year slump in U.S. residential real estate will vaporize $1 trillion in wealth, and hold back consumer spending.

The U.S. investment bank published a report on Wednesday that predicts U.S. house prices will decline 3 per cent over the next year, and another 1 per cent the following year.

With the support from government housing policies expiring, we expect the overhang of existing houses and the rise in mortgage delinquencies to take their toll,” said Goldman Sachs economist Sven Jari Stehn in the report.

Using common sense economics that shows consumer spending is linked to a combination of both household wealth and income, Goldman Sachs looked at what a prolonged real estate slump would mean to individual Americans – who collectively are one of the most powerful economic drivers on the planet.

“Our 3-per-cent decline in nominal house prices implies a $1-trillion loss of housing wealth,” said Goldman Sachs. “The negative wealth effect would shave between 0.2 and 0.8 percentage points off private consumption growth.”

“These calculations reinforce our view that the economy is on track for a sluggish recovery and that real GDP growth is likely to slow to a 1.5 per cent (annualized) rate in the second half of 2010,” said the investment bank.

Source: What's Next for U.S. Housing?