Here it is the beginning of October, and so far 2005 has been an absolute loser for the folks on Wall Street. While business columnists, Fed officials and stock market analysts prattle on about the potential for a housing bubble, the stock market has quietly settled into a trough.

On January 3rd the Dow Jones Industrial Average closed at 10,729.43. As of the close on October 6th, the index was at 10,287.10 This is a drop of some 442.33 points (4.1225 percent), but the real decline is more significant. While Wall Street has been falling, inflation has been at work devaluing the dollar. In the past year, the Bureau of Labor Statistics reports that the Consumer Price Index increased 3.6 percent. Combine the drop on Wall Street with reduced buying power and real stock market losses are significant, even -- forgive me -- bubble-like.

Meanwhile, the real estate market churns along, defying financial gravity and common sense. The National Association of Realtors reports that existing home prices rose 15.8 percent in the past year. The typical existing home now costs $220,000.

To some extent real estate prices are rising because we are not measuring like items. A house may be a house, but today's homes seem to grow almost monthly and one reason they cost more is that they contain a greater volume of space than earlier models. The National Association of Home Builders says that an average new home built in 2004 had 2,349 square feet -- up almost 200 square feet when compared with homes built as recently as 1997.

The catch is that real estate and securities are all part of the same economy. In the best of worlds, at least realistically, you would like to see values on both Wall Street and Elm Street increase at a level above the rate of inflation to create additional buying power and thus real wealth. Alternatively, you don't want prices to rise too fast and spur inflation.

How home prices have risen is something economic historians will one day explain. For now, it's hard to understand how prices have soared while household earnings have declined. According to The New York Times, "the total income of Americans in 2003, adjusted for inflation, was 4 percent smaller than in 1999." (See: Income Down From 1999, Tax Data Show, September 28, 2005)

One of the most remarkable areas of real estate speculation now concerns the areas hit by Hurricanes Katrina and Rita. NBC News reports that "it's widely believed here that developers will soon buy up whole blocks of destroyed homes to make room for lucrative casinos, condos and entertainment complexes. But in damaged low-income neighborhoods, renters fear they will be edged out for good."

If prices on Wall Street today reflect future economic prospects, then what is it that real estate pricing represents? Why is one measure rising while the other is settling like loose feathers in a pillow factory?

Part of the answer, I suspect, concerns the psychological value of real estate. A home is more than an investment, it's that secure place away from the world's troubles -- everything from traffic congestion to world events. Thus people are willing to put more into a home because it is, in a sense, more than housing.

That said, if we have generally increasing home prices and generally decreasing wages, someone is being left out. Reduced values on Wall Street also mean some people will have fewer dollars for down payments.

The comforts of home can only go so far and in an era when the cost of heating and cooling is soaring, barn-like houses with more interior space than Carnegie Hall are destined to become the SUVs of real estate.

What to do? If you have an ARM or one of the loony high-risk loans with low payments now and vastly higher payments tomorrow, take a look at fixed-rate mortgages. And if you're in the market for a home, think modest -- such properties are apt to be most in demand once the financial dust settles.

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