Experts: A 'Correction' Unlikely to Plunge Sales into Steep Dive

Consumer spending, including the purchase of homes, has been buoyed by the bull stock market all year.

As their brokerage accounts bulged (and mortgage rates dropped), more and more Americans have traded up to larger, fancier homes. This is expected to be the third year in a row that sales of existing homes set a record.

The National Association of Realtors estimates that home resales will exceed 4.5 million single-family units this year. And home builders are expected to start construction on about 1.5 million units.

All this occurs against the backdrop of concerns that aging baby boomers will move less often and thus set off a protracted slump in housing demand.

But would a stock market correction, which many believe is under way, finally put a brake on the runaway housing market? Three economists fielded that question for American Banker last week.

Sung Won Sohn, chief economist, Norwest Corp.

Money will flow to the bond market, rates will go down, and that will be a positive (for housing). But interest rates have been quite low, and I don't expect this to be a big positive.

I am more concerned with the negatives. Our calculations show that about 25% of consumer spending is related to the wealth generated by the stock market.

Household net worth has grown from $4 trillion in 1990 to $13 trillion today, and that has supported the housing market. If we were to have a correction, this will stop many housing (purchases), especially among upper-income buyers.

I do expect some slowdown, but slowdown from a very high plateau.

Diane C. Swonk, deputy chief economist, First Chicago NBD

It's an asymmetric equation: We didn't see the housing market benefit from equity market gains until you saw substantial gains over several years.

Now that there's been a minor correction, it's not as if all of a sudden all the wealthy buyers are going to disappear.

Has it substantially changed their view of their long-term wealth? Probably not. We're still substantially ahead of where we were a year ago.

We all concentrate on the wealth effect. (But) in any spending decision, the single most important component is the money people have in their pockets every month.

The fact that real wages have been rising for the first time in three decades is likely to overwhelm any volatility in equity markets when it comes to home purchases.

First-time buyers have continued to account for a substantially large share of home sales. The wealth effect is a very small portion of the market.

David A. Wyss, research director, Standard & Poor's, DRI

The blunt fact is that people feel they can afford all these houses because they have so much money in their brokerage accounts.

It (housing) could slow down a bit as a result of this.

That probably means a decline in starts; sales will remain good.

Starts depend on demand further down the road, and you just can't keep up this pace.