Pessimism from housing sector economists was loud enough to convince Federal Reserve (FOMC) Chairman Ben Bernanke that inflation might be temporarily under control, thanks largely to the fumbling national housing market. Mired in fear, rising gas prices, and fluctuating higher mortgage interest rates, housing is predicted to turnaround in sales and prices later than sooner.

Testifying before the Senate Banking, Housing, and Urban Affairs Committee , Bernanke said that the FOMC is holding overnight interest rates steady at 5.25 percent but is closely watching inflation, which is a "predominant policy concern."

The Fed forecasts that inflation will ease over the next couple of years, and that 2007 will see a rise of 2.0 to 2.25 percent in inflation, based on core consumer consumption, and about 1.75 to 2.0 percent in 2008, which is in Bernanke's stated "comfort zone."

Risks to inflation include an improving jobs market, but Bernanke was quick to note that higher wages doesn't automatically result in higher inflation if productivity is also higher. He says the job market should remain healthy with rising incomes and unemployment hovering at about 4.75 percent to 5.0 percent, slightly higher than 2006.

Gross domestic product should grow 2.5 percent to 3.0 percent in 2007, with growth in the 2.75 percent to 3 percent in 2008.

But a worsening housing market could hurt overall economic growth, and in that case, the Fed would consider lowering overnight rates to banks.

"Even if housing demand falls o further, weakness in residential investment is likely to continue to weigh on economic growth over the next few quarters," said Bernanke.

This statement is solidly in line with dour forecasts from housing economists.

"We're going to see a much bigger drop in investor demand this year," says David Berson, chief economist for Fannie Mae. "but by the second half of the year, the market will stabilize, if investors can pull out quickly."

Berson told CBS Marketwatch that he "expects the home-price index as calculated by the Office of Federal Housing Enterprise Oversight to show it's first year-over-year decline in home values since such data was first collected back in 1975. Unlike the National Association of Realtors or National Association of Home Builders (NAHB) price data, the OFHEO measures the prices of the same homes over time.

The NAHB admits that there's still a huge overhang in inventory that has been wreaking havoc with builders' bottom lines as they apply incentives to entice homebuyers in a fear-corroded market. Housing starts won't rebound until 2008 and prices will rise an anemic 1.3 percent according to NAHB forecasts.

This could set the stage for home sales to weaken further, as builders continue incentives and as existing home sellers lower prices to compete.