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The real estate market is at an all-time high across the globe and is driving America's economy. What could possibly go wrong?

12:00 AM, Aug 30, 2005 • By IRWIN M. STELZER
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Ammunition for those who see in these contradictory signs evidence of weakness in the market comes from the Mortgage Bankers Association, which reports that demand for mortgages is down 8 percent from its June peak, and from indications that houses in some areas (San Diego and Washington, D.C. are two examples) are taking longer to sell even after asking prices come down.

In the short term, it seems likely that the sour mood created by the continued violence in Iraq and the income-drag of high gas prices, will make consumers cautious. More important will be the prospect of steadily rising interest rates, which, experience in Great Britain, Australia, and New Zealand proves, can not only cool the housing market but, if overdone, threaten overall economic growth.

In America, rising rates will almost certainly take some of the froth off the housing boom in some markets. Buy-and-flip investors, whose purchases "seem to have charged some regional markets with speculative fervor," to quote Greenspan, are likely to begin to unload properties bought when "up" seemed the only direction in which prices might move. And the use of what the Fed chairman calls "interest-only loans and . . . more-exotic forms of adjustable-rate mortgages . . . may leave some mortgagors vulnerable to adverse events" when some $1 trillion of the nation's mortgage debt--12 percent of the total--switches to adjustable payments in 2007, up from $80 billion, or 1 percent, at present. Which is why the Chairman used his valedictory to his fellow central bankers, gathered in Jackson Hole last weekend, to include house prices among the "economic imbalances" that he fears might upend his successor.

FORTUNATELY, the longer-term outlook remains bright. Harvard University's Joint Center for Housing Studies points out that

* Housing is still relatively affordable in 77 of 110 of the nation's largest metropolitan areas;

* In several areas in which prices have risen most rapidly, "natural or regulatory-driven supply constraints may have resulted in permanently higher prices;"

* Household growth, and with it the demand for houses, is likely to accelerate over the next decade, with immigrants accounting for one-third of that growth;

* Baby Boomers, possessed of "record wealth [are] fueling the demand for . . . second homes";

* The increase in minority first-time buyers "is dramatic."

So if demography is destiny, things look good for homebuilders. And since homeowners don't dump their houses, in which most have built up substantial equity as well as emotional ties, at the first sign of a price drop (houses are not shares of stock, after all) the danger of a nation-wide significant downward price spiral seems minimal. Australia's experience suggests that an end of price increases need not precede the start of nation-wide price declines. Still, prospective buyers would do well to heed Professor Schiller's warning: "Beware"--of unaffordable mortgages, and tales of never-ending price increases.

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.