House market cools, but collapse unlikely

"Logic tells us there has to be some relationship between home prices and income. In many markets, that relationship is out of whack," says Nicholas P. Retsinas, director of the Joint Center for Housing Studies of Harvard University. "We see a slowing in the rate of [price] growth but we don't see widespread price corrections occurring."

While most markets won't see prices actually drop, some may. "A couple of areas are at risk of downward corrections," says real estate consultant Burns, citing San Francisco, San Diego, and Denver. His ranking of the most overpriced markets is at the website housingzone.com.

The outlook for real estate prices looms large in the economy. That is especially true now that some Americans are using housing investments as a haven from Wall Street turmoil. Some have been pulling money out of the market and buying homes with larger than usual down payments, says Celia Chen, senior economist with Economy.com, a research firm. She notes that 25 percent down payments are becoming more common. The value of a person's home has a significant impact on how he or she spends – a much larger impact the stock market investments. The Federal Reserve Board estimates that every $1,000 gain realized in the sale of a house boosts spending by $150. A comparably sized stock market gain increases spending by $30 to $50.

Different housing experts cite different definitions for a price bubble that could pop, causing home prices to collapse. For some, it is prices rising faster than the average buyer's ability to pay or prices rising unreasonably in relation to the rent a house could bring. Others say a bubble only occurs when price speculation happens at the same time a housing market has an oversupply of homes for sale. But all agree that a national real estate bubble is much more difficult to create than a stock market bubble.

"We have looked at the bubble question and concluded it's most unlikely," at the national level Federal Reserve Board Chairman Alan Greenspan said last week. "Unlike stocks where you have a single market, low transaction costs and ability of people to pile on nationally and cumulatively, residential housing markets are all local. Transaction costs are quite large. To unload your asset, usually you have to move."

Long term, the outlook for the housing market remains strong, economists say. The new Harvard housing report says that "while the housing market may cool in the near term, favorable demographics should prevent a deep chill."

The combination of strong growth in the number of new households coupled with baby boomers' increasing appetite for vacation and retirement homes "argues for a strong (housing) sector" for the next five to seven years, Harvard's Mr. Retsinas says.

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