Why Bubble Talk Doesn't Hit Home

Bubble, schmubble. But still, housing may cause trouble.

The residential real estate market, buoyed by record lows in mortgage rates, has played Atlas in this anemic economy. The 1997-2002 period witnessed a 27% increase in inflation-adjusted housing prices, the strongest five-year run going back to 1945.

Meanwhile, anecdotal evidence suggests money is moving from the stock market to the housing market, leading some observers to proclaim a "housing bubble."

Robert J. Shiller, Yale economics professor and author of Irrational Exuberance, is among those using the "B" word in connection with housing. "People say, Alan Greenspan doesn't think there's a housing bubble," says Shiller. "Well, he said there was no stock market bubble, too."

The housing market does show signs of leveling off, as evidenced by Wednesday's surprise 1.3% drop in sales of existing homes. And the refinancing boom, especially the cash-out deals that have fueled consumer spending in a tough economy, isn't expected to last.

Still, key differences between the housing and stock markets undermine the housing-bubble argument and the inevitability of a destructive collapse. Indeed, household incomes have largely kept pace with household prices, making a sharp decline in home prices highly unlikely.

Holes in the Bubble Argument

Even with historically low mortgage rates and aggressive lending practices, homeowners can't get approved to pay for homes too far beyond their income levels. Housing also has inherent value as shelter, and because of the time and money it takes to sell real estate, excessive speculation and turnover are discouraged.

Moreover, the rise in dual-income households means families can afford bigger homes. And finally, the National Association of Realtors has never reported a year of decline in nationwide housing prices since it began keeping score in 1968. (On a regional basis, however, there have been some steep declines that lasted several years.)