After months of silence, the bubble machine was back in action in April, noisily cranking out theory after theory that the housing market is full of hot air and doomed to the fate of an over inflated balloon.

From Wall Street to Main Street economic forecasters hammered away at their podiums with prophecies of higher interest rates, foreclosures and, ultimately, crashing home prices due to over-inflated home values and easy money's ever-higher mortgage debt-to-value ratios.

John H. Vogel, Jr., professor and faculty director at the Tuck School of Business at Dartmouth College, Hanover, NH described the housing market as a runaway train destined to derail in disaster.

Business Week's Mark Weisbrot alluded, strangely enough, to the 17th century tulip bulp industry and more sanely to Japan's economic woes in an editorial about weighty conditions poised to flatten the housing market.

Even Federal Reserve Bank assistant economist Hilary R. Croke's award-winning essay poo-pooing the bubble talk didn't convince contest sponsors Dean Baker and Mark Weisbrot, founders of the Center for Policy and Economic Research.

They insist the housing market is a catastrophe waiting to happen.

Economist Robert Parry, president and chief executive of the Federal Reserve Bank of San Francisco, sided with Croke and said the word "bubble" is a misnomer when applied to the housing market.

First, the housing market's recent history is marked by price drops that don't come near previous price gains and price drops are largely regional events triggered by local conditions.

Furthermore, any rise in interest rates signals a prosperous economy which brings with it job and income growth. Parry concedes higher rates could be a challenge for the housing market, but where there are housing shortages, the classic supply-demand equation leaves little room for price busting.

Quite the contrary.

For example, in California, where there has been a perpetual housing shortage for decades, the technology industry generated a housing boom during the mid-to-late-1990s when interest rates were as much as two percentage points higher than they are now. In the 1980s boom, mortgage interest rates averaged more than 10 percent, at times topping 11 percent.

Worst case scenario, even if the housing market does go bust, it doesn't take a fool to know the effects will be relative.

Or maybe it does.

Motley Fool's Dayana Yochim says a home is where you live, not where you play the market. A home, first and foremost, is a tangible asset designed to put a roof over your head, not padding in your portfolio. Home equity gain is a bonus, a perk. Equity loss, by itself, won't rip off the roof.

Yochim says buy a house because you believe it's the right thing to do based on your lifestyle, your personal family needs and your financial goals.

Sweating a bubble does nothing more than soak your hankie.

Rattled REITs Reveal Risk

Since the April 2 U.S. Labor Department report that payroll growth was the largest it has been since April 2000, the fear of growing interest rates sent Real Estate Investment Trust (REITs) indexes into a tailspin.

REITs are publicly traded companies that invest in and manage income-producing real estate property. Investors typically purchase REITs in the form of a professionally managed investment -- a mutual fund comprised of REITs. REITs provide a return in the form of increased share values, but investors also like them because REITs provide an income stream in the form of dividends.

Dividends have had a tough time making up for the 12 percent losses in indexes and stock downgrades in April over fears that interest rate hikes will impact profits.

Last year the National Association of Real Estate Investment Trusts' (NAREIT) "Homeownership and Investment in Real Estate Stocks" suggested a home is not a substitute for the diversity of real estate stock investments.

Given REITs' current volatility, that's debatable.

Right about now, a door key in you hand feels a lot more secure than a double digit hole in your portfolio.

Mortgage Interest Rates Could Level Off

Federal Reserve chairman Alan Greenspan's most recent comments may help patch that gaping hole in REIT-laden portfolios.

Greenspan hinted that rising productivity and low inflation could allow the Fed to keep interest rates at rock-bottom levels longer than anticipated.

That might also take pressure off rising mortgage rates, even though there is some question about the impact on mortgage rates with the Reserve moves.

By April 29, mortgage interest rates were as high as they've been all year swelling to an average 6.01 percent on a 30-year, fixed-rate conforming loan, according to Freddie Mac's Weekly Mortgage Market Survey.

Rates have risen 6 consecutive weeks since they hit the 5.38 percent bottom mark for the year, perhaps in false anticipation of the Federal Reserve raising interest rates.

That could change.

"The price pressures are not anywhere near where they would be under normal circumstances," Greenspan recently told members of the Congressional Joint Economic Committee.

Mortgage interest rates began the year at 5.85 percent before slowly sliding down to 5.38 percent and then turning up again.

Housing Mixes With Gasoline To Drive Up Consumer Prices

Some critics are questioning Federal Reserve chairman Alan Greenspan's comments about inflation not being sufficient enough for the Fed to raise benchmark interest rates.

When the U.S. Labor Department reported the Consumer Price Index rose a seasonally adjusted 0.5 percent in March, the increase in the closely watched measure of price inflation was larger than most economists had projected -- the greatest one-month gain in about 3 years.

Most of the gain came from energy's 1.9 percent jolt, as gasoline accelerated transportation costs by 1.1 percent. Consumers also paid more to get dressed. Apparel rose 0.9 percent. Medical care added a 0.6 percent bigger pill to swallow and the cost to put a roof over your head grew by 0.3 percent -- well, unless you live in California's Silicon Valley where a whopping $58,800 tacked more than 10 percent onto the median price of a single-family home.

Published: May 3, 2004

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.