A flight to quality, coupled with low interest rates, has caused many “investors” to sideline the stock market and put their money in real estate instead, giving the National Association of REALTORS two record sales years in 2000 and 2001.

While housing has slowed, both the new home and mortgage industries say that starts and loan applications are still highs. Still, many economy watchers worry that all it would take is a catalyst that would make consumers stop spending to put a prick in the housing bubble. The catalyst(s) could come from several directions.

While most housing experts, including the NAR, say that there is no housing bubble nationally, conditions underpinning the potential catalysts have definitely worsened over the past week.

Stocks

Last week, the DOW closed below the 8000-point benchmark, a six-week low. A growing number of bearish commentators say the stock market has further to fall. CBSMarketwatch commentator Thom Calandra, whose record of calling sector drops so far has been excellent recently, says the DOW is headed "into headline territory: the blazing headlines of single-day, 1,000-point drops."

Commenting on the precipitous drop by one DOW bellwether, EDS, in a Reuters report, chief market strategist at Kirlin Securities Tony Dwyer said, "You have to have more of a reason after losing so much to buy stocks other than they are down so much. Right now there is no fundamental reason. I don't think there is a tremendous downside risk but more a lack of upside potential."

The problem with stock losses is that many investors become risk-averse or they have lost enough that they sideline their remaining money. Further losses could mean an aversion to any market which may appear volatile, including the housing market. Sellers, with a stay-put mentality who aren’t in a must-sell position, may remove housing inventory from the market, or delay putting their homes on the market.

Tighter inventory may result in temporary appreciation in price, until housing affordability becomes an issue as it in California where only one-third of residents can afford median housing.

Jobs

Those precipitous drops in stock prices ultimately translate into job loss for hundreds or thousands as firms try to meet profitability margins. When companies can’t grow their sales, they do the next best thing – cut staff. As the stock market continues its descent, it’s little surprise that jobless claims are rising.

Last week it was announced by the Labor Department that jobless claims have risen to a four-month high. Initial claims in the week ending Sept. 14 fell by 9,000 to 424,000 from the upwardly revised 433,000 in the previous week.

What makes this trend even more disturbing is that continuing jobless claims are also rising. Continuing claims rose by 29,500 to 3.562 million, the highest since mid-July. In the week ending Sept. 7, weekly continuing claims rose by 71,000 to 3.615 million, the most since late June. These statistics indicate that the jobless are having a harder time finding new employment.

The jobless rate is at nearly six percent.

Mortgage loans are loans against income, while the property is considered the collateral for the borrower. If borrowers are concerned about income, as with job loss or threat, they won’t borrow. When buyers dry up, so does the real estate market.

Easy money

Average national fixed-rate mortgage interest rates have reached all-time lows, according to Freddie Mac, falling to 6.05 percent last week, 13 basis points lower than the previous week. This is the lowest recorded rate since Freddie Mac began tracking mortgages back in 1971.

Interestingly, following a record week for mortgage applications, homebuyers and refinancers eased off the pedal. According to the Mortgage Bankers Association of America, the composite index of loan applications fell 8.7 percent for the week ended Sept. 13, although the index still posted its second-best level ever. The group also said that applications for purchase mortgages and for refinancings fell, although the refinancing index also was at its second-best level ever.

Low-interest loans, relaxed lending standards, and special loan packages have enabled millions to get into homes they would not have otherwise been able to afford ten years ago.

These same conditions have also enabled people to run up unprecedented consumer debt on credit cards and to buy new cars at low interest payments. Some pundits worry that many of these borrowers should never have been given such unbridled credit in the first place. Many have used refinancing to eliminate debt, only to "reload," leaving them with high consumer debt payments and no further equity available for tapping.

Not surprisingly, bankruptcies and foreclosures are on the rise.

Bankruptcy rates have risen 15 percent - to more than 1.5 million in the 12 months ending March 31. A 56 percent increase in personal bankruptcy filings for Chapter 7 (total bankruptcy) and Chapter 13 (repayment of part of the debt), according to the Administrative Office of the United States Courts, is encouraging Congress to stiffen laws to prevent bankruptcy filing abuse. Before the laws are enacted, bankruptcies may increase, which will cause an inevitable tightening of credit, which will impact borrowers ability to pay for highly-leverage homes.

Concurrently, the Mortgage Bankers Association says that mortgage delinquencies have risen from 4.65 percent in the first quarter to 4.77 percent. While this figure lags delinquencies during the housing bubble of the mid-1980s of 6 percent, it is uncomfortably close.

Housing starts

According to the Commerce department, August housing starts fell 2.2 percent to a 1.61 million-unit annualized pace last month, following three months of housing start declines. Groundbreaking for single-family homes had its biggest drop since March - down 4.4 percent. Yet, starts are still 3 percent above last year, signaling a slowdown is simply a minor correction. Meanwhile, multifamily starts rose more than 8 percent.

Says Aquiles Pietri, an asset manager executive with Countrywide, “Being involved in the REO industry for a long time, I've relied on a number of bell-weather signals from other industries to give me insight as to where things may be headed. I've relied heavily upon one indicator that has never failed me, namely housing starts. If they're on the way down, REO's will follow about one year or so later.

If housing starts slow down over a six months (and we’re halfway there,) then a market correction will follow as new housing prices lowering will put pressure on existing home prices, he says.

Analysts were expecting an increase in housing starts for August of 1.8 percent. The drop was excused because of the rocky stock market, uncertain economy and a decline in consumer confidence.