Before the recent plunge in the stock market, the U.S. housing market was very strong. Could the fall in stock prices assisted by corporate accounting also lead to a downturn in the nation’s real estate market?

Household real estate rose in market value $903 billion, or eight percent, between first-quarter 2001 and first-quarter 2002. With such growth, it was a good time to own a home.

Analyzing data from the Federal Reserve System for January – March of this year, Jane D’ Arista of the Financial Markets Center found that U.S. households appeared to be recovering from the recession that officially began in March 2001. President Bush played a part in this.

His income-tax cut, for example, increased households’ disposable income. The fiscal stimulus from the president’s tax cut, however, won’t last.

Nevertheless, the tax cut did help to increase households’ savings and spending. And for the year ending last March 31, the net worth of households was up about two percent.

As the prices of houses rose, owners borrowed over $93 billion against the equity in their homes. The ratio of homeowners’ equity to real estate remained about what it was during past years.

In the meantime, stock prices slipped, but saving rates climbed. Households realized a gain of $340 billion in financial assets, while moving from risky stocks to safer savings deposits and mutual fund shares.

But all was not safety and security in the investment arena for households. Not by a long shot.

“Despite these shifts, households remain profoundly vulnerable to changes in asset prices,” D’Arista noted. “Notwithstanding the incremental movement to less-risky holdings, deposits and money market fund shares accounted for just 15.3 percent of households’ total financial assets at the end of the first quarter.”

Speaking of risk, direct holdings of corporate stocks accounted for $5.7 trillion of households’ overall $31.8 trillion in financial assets. Pension fund reserves constituted another $8.8 trillion.

Turning to consumer demand, recall that households’ buying power based on rising stock prices for such expenditures as home remodeling and leisure vacationing is called the “wealth effect.” When the good times rolled as they did during the all-time record party on Wall Street, the spending based on lending fun seemed as if it would never end.

Yet for U.S. households invested in financial assets, the “wealth effect” appears to be weakening, according to a recent Washington Post-ABC News poll. It confirms D’Arista's analysis.

“A fall in the housing prices would obviously undermine the indispensable support home equity borrowing and refinancing provide to household consumption,” she warned. “And by lowering the value of both tangible and financial assets, falling housing prices would further dampen demand by diminishing households’ net worth.”

Against this backdrop, there can be no economic recovery in the U.S. before the return of corporate profitability. This factor, which corporate fraud has attempted to and ultimately failed to hide, is that profits flow from industrial production, not financial speculation.

Below the surface of the stock market, it was the crisis of production, overproduction, in a word, that set current events in motion. In a world of unmet human needs, saturated markets with things that people have made but couldn’t be sold for profit at prices that exceeded production costs sent the stock market skyrocketing.

Concerning Wall Street’s woes, Federal Reserve Chairman Alan Greenspan recently blamed "infectious greed." But that is an effect, not a cause.

The U.S. housing market is a part of, not apart from, this generalized world crisis of overproduction in commodities ranging from cars to coffee, computers to fiber optics. How different industries deal with this crisis as it affects and is affected by all industrial corporations and financial institutions involved is sure to bring con-tinued disruptions to society in unforeseen ways.

In the meantime, U.S. households live in a nation which has the planet’s largest economy and is the world’s biggest debtor. These are but a few of many factors that make the exact timing of downward pressure on the market value of U.S. real estate hard to pinpoint.

The stock market remains overvalued by historic standards. Corporations have not begun mass layoffs.

And state and local governments? Their fiscal crises will likely weaken the public’s purchasing power.

Much is unclear except one thing. Economists who looked below the surface of the stock market boom and offered radical analyses were excluded from political circles of power in the U.S.

That should now be a topic of discussion on Capitol Hill. But it isn’t and the silence is deafening.

Seth Sandronsky is an editor with Because People Matter, Sacramento's progressive newspaper. Email: ssandron@hotmail.com

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