This column was originally published on RealMoney on Sept. 30 at 2:30 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

There are now more negative factors for the housing market than at anytime in a number of years.

The pressures coming to bear are likely to reduce the speculative fervor that has contributed to the recent surge in home prices. These conclusions might seem odd in the face of the continued low level of mortgage rates, but they fit well with many other factors that influence the housing market. In other words, investors would be wise to use more than the mortgage rate as their key predictor of what will happen next in the housing market.

I have been bullish on the housing market for several years, but as many of you may have noted, I have been penning less sanguine views about its prospects of late. Mind you, I do not believe that a deep, lasting weakening of the housing market is in the offing; there are too many positive deep fundamentals that continue to support the market. Still, there are reasons for caution now, and investors seem to be believe as much, judging by the way that homebuilders' shares have performed over the past two months, with some falling as much as 20%. Just plucking a few names at random shows Centex ( CTX) and Toll Brothers ( TOL) both down about 20%, and Pulte ( PHM), Lennar ( LEN), KB Home ( KBH) and DR Horton ( DHI) down around 11%-14%.

If the housing market weakens, it will of course reduce some of the recent buoyancy of consumer spending. Any weakening, however, is unlikely to spur sharp weakening in the overall economy, contrary to views expressed by those worried about a bursting of the supposed housing bubble.

In analyzing the prospects for the housing market, one must go well beyond a glance at mortgage rates, particularly in the current situation because there are reasons to believe that housing could weaken even if there is no increase in mortgage rates.

Here are factors that are likely to weaken the speculative fervor in the housing market and also reduce the upward thrust in home prices:

  • The Fed is pressuring banks to tighten their lending standards: It is no coincidence that Federal Reserve Chairman Alan Greenspan has been speaking frequently about "signs of froth" in the housing market and of the signs of imprudent mortgage lending. It is also no coincidence that Greenspan in just this past week released the first study that he either authored or co-authored in ten years, writing an 83-page paper on "Estimates of Home Mortgage Originations, Repayments, and Debt on One-to-Four-Family Residences." The talk is that the Federal Reserve is now reviewing lending standards at top mortgage lenders, which will be used as a model for issuing regulatory guidance to other banks around the end of this year. In such cases, the Fed can pressure banks to adhere to its guidelines via verbal suasion, and by its power to issue supervisory letters and or perhaps by being more scrutinizing toward banks that do not follow the guidelines. The Fed can also issue less favorable reviews of institutions seen as engaging in imprudent lending practices.

    The Fed's motivation to pressure banks is rooted in a number of factors. For starters, the Federal Reserve is responsible for overseeing the banking system. The Fed's actions are therefore an act of fiduciary responsibility. Second, the Fed is likely worried that its power has been diminished by the plentiful supply of capital in the mortgage market, which has been made more plentiful in recent years by the large government agencies, Fannie Mae and Freddie Mac. Third, the Fed is likely concerned that if the housing market were to have a hard landing, the impact would extend beyond the housing market into the financial markets, where there are large derivatives positions held against mortgages and mortgage securities.
  • Housing Affordability: The housing affordability index, which is released quarterly by the National Association of Realtors, is now at its lowest level since 1981. That said, at 120.8, it remains high enough to indicate that no deep weakening of housing demand is likely. When the index is at 100, a family earning the median income has exactly the amount needed to purchase a median-priced resale home using conventional financing and a 20% down payment.

  • The Fed's Rate Hikes Will Reduce Liquidity: When the Federal Reserve raises interest rates, it doesn't do so by fiat. The Fed doesn't wave a magic wand and say, "Interest rates will be 3.75% today." Instead, the Federal Reserve conducts what is known as an interest rate-targeting regime, which requires that the Fed must adjust the level of banking reserves to bring the federal funds rate to the Fed's target level. This means that in order for the Fed to raise the fed funds rate, the Fed must reduce the amount of reserves that it adds to the banking system. Eventually, this will reduce the amount of credit available to buoy home prices.

  • Unsold Home Levels Are Rising: The inventory-to-sales ratio for new homes is now at its highest level since June 2000. Simple ECO 101 tells us that an increase in supply will normally be associated with a weakening in pricing power.
  • Price Gains are Already Slowing: For new home sales, price gains have been moderating for months and the year-over-year gain stands at just 1.0%. Rapid price gains have given the speculator reasons to buy (they always do, whether it's tulips or dotcom stocks, or whatever), so the recent moderation reduces a key impetus for the speculator to keep buying.
  • Consumer Confidence Has Plunged: The two main pillars of the housing market are consumer confidence and income growth. Confidence has plunged, and this will hurt a key underpinning of the housing market.

These factors all appear to give reason to believe that home price appreciation will likely slow in the year ahead. That said, a deep and lasting weakening of the housing market is unlikely in light of deep and powerful underlying fundamentals such as demographics, trends in long-term interest rates, and relatively low inventory levels compared to historic trends.

P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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