Would A Stock Market Crash Help Real Estate? by Lew Sichelman All together now: Gimme a "C." Gimme an "R." Gimme an "A." Gimme an "S." Gimme an "H!" Wadaya got, "CRASH!" As in stock market. No, I'm not out of my mind leading a cheer for a stock market crash? Not when you consider the alternative could be - mortgage rates of 10.5 percent or perhaps even higher. At least that's what economist Joel Prakken sees on the horizon if the market doesn't come to its senses. "We ought to be rooting for a crash," he says. "Without it, rates would be a heck of a lot higher than they are right now." Prakken, whose firm, Macroeconomic Advisors, is widely considered to be one of the most accurate forecasters in the country, admits "there's no question" the wealth that has been created as a result of the burgeoning equities market has been a boon to housing. But if a correction doesn't occur soon, he warns, the result will be higher loan rates. And that will serve to hurt housing more than the stock market has helped. Actually, the stock market has helped boost housing in two ways, says Prakken, whose firm changed its name from Laurence H. Meyer & Associates when its namesake assumed a position of the board of governors at the Federal Reserve Board in 1996. It has helped drive the ownership rate to its highest level in history, and it has enabled many people to buy more expensive houses than they might ordinarily purchase. "Since 1995," he says, "starts have been growing faster than the increase in the number of households, and the stock market has payed a key role in that. And there's been a noticeable increase in more expensive houses since the market exploded, too." But if the market continues unabated, the Fed will continue to tighten the screws on interest rates, the economist cautions, and that could have an even greater impact on production. Housing, he says, "just tanks even further." By Prakken's reckoning, mortgage rates in the 10-11 percent would cause housing starts to plummet by some 125,000 units. But if the stock market was to get itself under control and the Fed decided further tightening was unnecessary, he says starts would fall by just 50,000 units. Fortunately, the economist is predicting that the latter scenario will come to pass. Indeed, he sees "an immaculate," 13 percent stock correction by the end of the year. "It just comes," he says, "as investors realize that analysts' projection of earnings are overstated and that the market can't grow three times as fast as the economy forever." Meanwhile, Joseph Hu, managing director of structured financial rations at Standard & Poor's, thinks the Fed might be missing the potential impact higher mortgage rates might have beyond the housing sector? "A lot of non-housing related activities are financed" though the mortgage market, Hu says. "What I'm afraid of, and what the Fed may be overlooking, is that by slowing housing, it will also slow home equity financing, and that could have a more severe impact on the economy than the Fed intends." According to a 1998 Fed survey of consumer finances, 68 percent of all home owners have some mortgage debt, 20 percent greater than ever. And there's much more to come, according to Hu. "There's a huge amount of home equity debt still to be tapped. Not everybody is going to extract it, but the number of is big perhaps as much a $5.3 trillion." Major expenses financed by home equity loans include home improvements, 43 percent; debt consolidation, 21 percent; investments, 8 percent; education, 6 percent, and the purchase a vehicle, 5 percent. The economist pointed out that the two major financing trends of last five years -- rapid expansion of subprime lending and increased origination of second mortgages, which, even though lenders might not admit it, also are subprime loans are both directly related to home equity financing. The term "housing finance" isn't what it used to be, he says. Prior to 1995, the emphasis was on finance as the industry worked to find ways to put people into houses. Since then, though, the emphasis has been on housing, and using the equity people have built up in their houses to finance consumption expenditures. | 
