For those of you who thought we were set for a "soft-landing" in the housing market, I have some bad news for you.

And it doesn't come from me. It comes from a feature article in Fortune magazine — in an article titled "Can the Economy Survive the Housing Bust?"

The article states, "Real estate downturns have a way of leading to recessions and stock market slumps [emphasis theirs]. So far, the damage has been limited, but the numbers keep getting worse."

According to Fortune, the housing market fall-off is a reliable predictor of a downturn in the stock market.

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If they are right, the S&P 500 is in for a huge plunge next year. [Editor's Note: Read Financial Intelligence Report's special report on the 5 Things You Must Do to Profit from this Crash — Go Here Now.]

A chart plotting the National Association of Home Builders' Housing Market Index — a monthly measure of builder confidence — shows a remarkable parallel with the S&P 500 stock market index a year latter.

For example, a rising NAHB index predicted the start of the post-1994 bull market in stocks, and its decline beginning in 1999 presaged the equity market collapse the following year.

Then a spike in builder confidence in November 2001 came a year ahead of the stock market surge that started in October 2002.

The bad news: Over the past year the NAHB Housing Index has dropped an incredible 54 percent!

If stocks followed suit, the S&P could be halved by this time next year, according to the ominous report in Fortune.

"In terms of consumer spending, I don't think we've felt anywhere near the brunt of all the adjustable-rate mortgage resets and the massive increase in defaults and foreclosures in states like California," said Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., one of the experts who believes the NAHB drop bodes poorly for the stock market.

"Housing downturns happen in a fairly slow-motion way, and I really think we're just at the beginning of the impact on the market and the economy," she told Fortune.

Of course, she is right. Real estate collapses seem to mimic a tidal wave: In the beginning it looks like nothing more than a gentle wave . . . and then, POW! the wave hits. This is so true in housing where owners don't want to re-adjust prices down, so they keep holding. This holding pattern makes inventories of homes for sale skyrocket. At some point — the tipping point — buyers begin to sell no matter what the price. The collapse is then upon us. Interestingly, Sir John Templeton predicted all of this in a special interview with FIR. Read more about Templeton's views — Go Here Now.

Not everyone agrees with that position. "The effects of the housing correction will be entirely contained within the housing sector," said Mike Englund, chief economist of Action Economics.

He points to strong corporate balance sheets, stable interest rates and falling energy prices as factors working against a stock market meltdown.

But economist Ed Leamer, director of the UCLA Anderson Forecast, is pessimistic. "We've had 11 sharp declines in the housing market since World War II, including this one. Eight of the last 10 were followed by a recession."

The Ripple Effect

The big risk is the ripple effect, Fortune reports.

Solid home sales not only boost home builders' and materials manufacturers' profits, they generate spending on new mortgages, realtor's fees, home improvement projects, new furniture, and more.

Another concern: With home values falling, consumers will no longer be able to easily use their homes as cash machines. U.S. homeowners pulled an estimated $450 billion or more in equity out of their homes last year.

What's more, homeowners who took out adjustable-rate mortgages several years ago are now facing interest rate resets that will raise their payments — and consequently decrease their spending on other items.

"It's hard to overstate the damage of losing so much potential buying power," Fortune reports.

"Merrill Lynch economist David Rosenberg has argued that cash-out refis were the only reason the economy weathered the gas-price hikes this year and last."

Another pessimist, Gary Gordon — an executive vice president at mortgage investment firm Annaly Capital — is so concerned about the loss of cash-out money that he's forecasting a recession next year or in 2008.

Action to Take

First, don't get caught off guard. Do all the things you might do to prepare for a recession in your personal affairs, such as reducing debt, keeping a secure job, etc.

Second, remember — our Financial Intelligence Report has been saying "cash is king." Even great stock players know when it's smart not to be in the game. Today, that's true. Read our report about cash. Simply Go Here Now.

Third, adding to the housing crisis is the beginnings of the baby boomer crisis. This will only add to market woes — Read More Here.

Fourth, you can no longer keep 100 percent of your assets in the U.S. Consider countries to invest like India (special report — Go Here Now), Switzerland (more — Go Here Now) and Asian countries (Read Alexander Haig's advice — Go Here Now).