Given the reprieve in the bloodletting and the market's relative calm so far today -- although the

Dow

had slipped from earlier gains heading into the afternoon -- I wanted to follow up on a story last week about

the housing market.

The piece drew scads of email, as stories about housing are wont to do these days. The majority of respondents agreed that housing is in a bubble; anecdotal evidence was confirmed by today's story in

The Wall Street Journal

about homeowners "cashing out."

Andreas Calianos, head trader at Semiotics Partners in Northampton, Mass., suggested the "controlling long-term issue in housing" is demographics. The 35-to-54 age bracket -- the nation's primary homebuyers and consumers in general -- peaked in 2001 at 30% of the total U.S. population and is projected to decline as a percentage of the total until 2045, he noted. "So demographic growth is shifting away from the 'super-consumer' toward the savers (55-plus) and the low wage earners (34 and under)," Calianos wrote. "This is the big, big story, and it will only play out at glacial speed."

Housing Bubble Bath?

The implication being that the housing market may have peaked but isn't going to implode in rapid fashion. Another reader suggested the prevailing negative sentiment about housing "reminds me of the bears who were hand-wringing about stocks in the late '90s." (Again, my thesis is that housing is in a bubble, but the question is what stage, i.e., Nasdaq 1996 or 2000?)

In a similar vein, Tobias Levkovich, U.S. equity market strategist at Salomon Smith Barney, noted that 70% of Americans own their homes (actually 67.4% according to the 2000 census) vs. 10% of Americans owning 82% of equities (not sure of the source, and he wasn't available for comment).

The point being, changes in housing prices have a much more dramatic effect on consumer spending than changes in equity prices, and that is precisely the point James Padinha, economic strategist at Arnhold and S. Bleichroeder, made in a recent note. "People give far too much weight to stock wealth and not nearly enough weight to housing wealth," Padinha wrote. "Stocks are low on the list of spending drivers, especially for normal people," and explains why, despite the carnage in equities, there has not been one negative quarter of household consumption expenditures this cycle. (As an aside, Padinha, who is a friend and who used to work here, is far from "normal," but that's another story.)

'Equity Extraction'

Echoing the recent comments of

Fed

Chairman Alan Greenspan, the strategist observed how low mortgage rates are fueling strong demand for housing and, "through equity extraction," are supporting consumer spending. Rising home prices have "significantly increased the equity in houses that homeowners can tap through home equity loans and mortgage refinancings," he wrote, noting that real estate loans grew an average of 1% per month in May and June, double the average of the prior 18 months, while revolving home equity loans grew an average of 2.8% per month in the 10 months through June, the biggest increase since 1988.

"Does this not suggest that consumption will surprise strongly to the upside over the next few quarters?" Padinha mused. "In any event, consumer behavior is much less mystifying if we give more weight to a 15% increase in housing prices than we a do a 40%

or more decrease in stock prices." (From 1999 to the first quarter of 2002, the median price of an existing single-family home rose 13.3%, according to the National Association of Realtors.)

Of course, the worry among many observers (Padinha included) is that increasingly indebted homeowners might struggle to repay those loans if unemployment rises, and that higher interest rates will crush the recovery, given that it's built on consumer spending. As I wrote last week, Greenspan & Co. have gambled that by leaving interest rates at historic low levels, consumers will keep borrowing and spending, buoying the economy until business spending revives.

The

real

bubble in housing is on the credit/debt side, a concept that been somewhat muddied by accompanying debates about home prices and homebuilding stocks. (Thanks to

TSC's

Eric Gillin for helping me crystallize that thought.)

"Lending got really aggressive, out of control in about 1998-99," said a mortgage broker in Austin who happens to be my cousin. Lenders now have "things

more under control with risk -- but the collateral, or the value of a house, is the wild card. With values of homes up 20% there's room for that to come back down, and the risk of bad loans or people being upside down on their mortgages," meaning they will owe more than their homes are worth.

Regional Disparities

My cousin agreed, however, with Greenspan's contention that housing is such a localized phenomena that a national bubble is unlikely. Austin, where he is based, has been a "buyer's market" since the bursting of the high-tech bubble. "Realtors are saying 'things are moving slower,' prices are coming down, and builders are giving ridiculous incentives" on some homes, he said. Conversely, Houston's market remains brisk, despite the unraveling of

Enron

and other energy-trading concerns.

Back on the macro front, Goldman Sachs economist John Youngdahl recently observed a "substantial shift" toward adjustable-rate mortgage loans, citing weekly data from the Mortgage Bankers Association, despite the decline in long-term interest rates and accompanying decline in fixed-rate loans.

It's unclear whether the shift is due to homebuyers' belief that financial markets are wrongly assessing the odds of sizable Fed rate hikes over the coming years, or "pressures on households to assume higher levels of mortgage debt to maintain standards of living in a time of elevated home prices and deteriorating nominal income gains and expectations," Youngdahl wrote. "The answer to this question could hold important implications for the overall business outlook."

Indeed it could, as (again) consumer spending is the proverbial "last shoe," and housing is currently the lace holding it together.

Or, to quote the great poet/philosopher Jimi Hendrix: "And so castles made of sand, slip into the sea ... eventually."

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.