Why Bubble Talk Doesn't Hit Home

Of course, the biggest explanation for increases in housing prices is low mortgage rates. With mortgages around 6%, people can reasonably finance more expensive homes.

"It's not ludicrous for people to pay a higher price now," says Terrance Odean, behavioral finance professor at University of California in Berkeley. Even if they thought they were overpaying, "if they pay $400,000 today and in a few years sell it at $380,000, they may be better off with the lower loan."

Where There's Trouble

But despite the many factors that likely could prevent a housing collapse, most forecasters do see the housing market easing, with rising prices tapering off and sales activity slowing.

"The housing sector will be a drag on the economy in 2003," said Lawrence Yun, economist at the National Association of Realtors. "Having done its job, it's hard to move up."

Forecasters also expect mortgage rates to rise. The National Association of Realtors expects mortgage rates to rise from 6.3% at the end of 2002 to 7.3% by year-end 2003. "Mortgage rates have probably already bottomed," says NAR's Yun.

While mortgage rates remain at the low end, even a one percentage-point rise in rates would slow the housing market and slow the refinancing boom that has boosted certain sectors and lined the pockets of many homeowners.

1. Naples, Fla.

2. Monmouth Ocean, N.J.

3. San Jose, Calif.

4. San Diego, Calif.

5. Orange County, Calif.

6. Colorado Springs, Colo.

7. Baltimore

8. Denver

9. Sarasota, Fla.

10. Miami

Cash-out refinancing, when homeowners refinance and take equity out of their home, "is just soaring," says Celia Chen, senior economist at Economy.com "People are either paying down existing debt or buying things they need."

Economy.com estimates that cash-outs from refinancing will total $138 billion this -- or 1.33% of the total GDP. That's up from $100 billion in 2001. The money is being used for a variety of things -- paying down debt, remodeling homes, buying cars. (Consumers increasing use of cash-out refinancing to keep spending like it's 1999 has raised some concerns. See the accompanying article Refi Redux here.)

This cash spigot has been a key component to consumer spending strength. "What we've seen in the past eight weeks with refinancing is unprecedented," Phil Colling, economist at Mortgage Bankers Association.

Another cause for concern are overheated regional housing markets. Some housing experts and economists say several regional markets do look and smell like a bubble. Parts of California, Colorado and Florida are cropping up on several watch lists.

While "the popping of those bubbles will not have a major national effect," Banerji says, it may serve to further erode the economic outlook in Silicon Valley, Denver and other business centers.