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A wave of money hitting the U.S. economy has some investors harking back to the good old days when the Nasdaq seemed invincible. But while it's possible that the monetary and fiscal stimulus sloshing through America may give rise to another bubble, rest assured that the bubble won't be in stocks.

Real estate, however, is another matter.

In the aftermath of Sept. 11, the

Federal Reserve

opened up the spigots wide. Measures of money supply ballooned to unprecedented levels as the bank aggressively added to reserves, while the Federal Open Market Committee's two half-point cuts signaled that the Fed will continue an aggressively stimulative stance. Meanwhile, Washington watchers expect the government to have passed a $50 billion to $75 billion growth package by Thanksgiving.

That money needs to find a home, and if past experiences are any barometer, the infusion will find a home in whatever investments are working best. What's working best lately has been real estate: Even as the economy-at-large has suffered, home prices have kept moving higher and the pace of home sales has increased. Some well-known shorts (like David Tice of the Prudent Bear Fund) have even professed a real estate bubble, and while that may be debatable, there is a risk that a bubble could be in the making.

That might be fun for real estate investors -- for a little while -- but it's a prospect that investors in general should be worried about. Whenever a speculative bubble comes to an end, the negative effect on the economy is profound. The bursting of a real estate bubble is no exception -- as anyone in Japan could tell you.

Looking Back

The last time money was pumped aggressively into the economy was in the months running up to 2000, when central banks worldwide were worried about the possible effects of computer glitches on the financial system. This came on top of an already accommodative monetary policy put in place during the 1998 Russian debt crisis. The money needed a home and, with the benefit of hindsight, lots of observers reckon that home ended up being tech stocks. In effect, the liquidity boost that was meant to assuage the fears of the timid ended up emboldening speculators. The Nasdaq blossomed, running up 70% from November 1999 to its top on March 10, 2000.

Moving on Up
Existing-home sales keep rising

Source: National Association of Realtors

But going into that move, tech stocks were a hot investment, flush with speculation. It wasn't just the excess reserves that made stocks froth higher, says Trilogy Advisor's chief investment officer Bill Sterling, but "some eager people who were willing to borrow freely for investing in the stock market."

Since the Nasdaq top, however, investors in the stock market have been beaten down and demoralized in a way only a Boston sportswriter could describe. Even if Alan Greenspan stood at the corner of Wall and Broad passing out C-notes, it would be hard to convince people they should put that money in stocks.

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Champagne Wishes
Home price increases creep past mortgage rates

Source: Federal Home Loan Mortgage Corp.

Yet real estate has remained a good investment. Even as the economy ran into heavy headwinds this year, housing held up remarkably well. Existing-home sales were running at an annual rate of 5.5 million in August, more than a million over their pace five years ago. In the second quarter, the average home price rose by 8.5% over the year-ago period -- about 1.5 percentage points over the average rate on a 30-year fixed mortgage during that period.

The last time home prices were appreciating at a quicker pace than mortgage rates, points out Northern Trust chief U.S. economist Paul Kasriel, was during the speculative housing market of the late 1970s.

Mmmmmmm, Money
M2 sees a growth burst

Source: Federal Reserve

Now he says that even though the housing market has become frothy, the Fed and the government are at pains to keep it from deteriorating. "The banking system owns a lot of mortgage paper, directly or indirectly," notes Kasriel. "If the housing bubble bursts, you're going to have a sharp increase in defaults and what went on in Texas in the late '80s and early '90s will be a more national phenomenon. That's why Greenspan is so intent on keeping rates low, and that is why the administration is so concerned about the impact of fiscal stimulus on longer maturity rates."

Looking Up

Even if you don't think real estate is a bubble, with all the money coming into the economy, it could be a bubble in the making. Money tends to be drawn toward whatever investments are working, and when a big bulge of money comes down the pipe, whatever's working can end up rocketing higher.

And even with the specter of recession and rising unemployment, there's a fair chance that real estate isn't about to stop working here. Low rates have made for a big boost in mortgage refinancing. The Mortgage Bankers Association's refi index last week hit its second-highest level since it was started in 1990, and it will probably hit brand-new all-time highs before too long. Homeowners who have seen their equity investments tank have also seen the value of their houses continue to rise, contributing to the notion that real estate is a rock solid investment.

The Boom
Refinance index keeps rising

Source: Mortgage Bankers Association

Ironically (yes, we know irony is dead, but bear with us), if housing does not pause for a breath here, according to Salomon Smith Barney analyst Stephen Kim, the stocks of homebuilders and the like may face headwinds. The long boom has, he says, "made investors concerned that they are buying these builders at the top." Over the past five years, the earnings of the builders in the

S&P 500

have annually gained 30%, on average, yet their price-to-earnings multiple has fallen to 6.4 from 14.5. "If you have an economic downturn without a housing downturn," says Kim, "these stocks will not perform as well as they would if you had both."

But the other possibility is that if housing continues to percolate along, investors will come to think of real estate as recession-proof. Now where have we heard that before?