"SOME ARTIFACT or some development, seemingly new and desirable--tulips in Holland, gold in Louisiana, real estate in Florida . . .--captures the financial mind. . . . The price of the object of speculation goes up. . . . This increase and the prospect attract new buyers; the new buyers assure a further increase. Yet more are attracted . . . ". So economist John Kenneth Galbraith writes in his "Short History of Financial Euphoria."

That, worry many observers, describes America's housing market. Stories of people buying condominiums in the morning, and selling them for a substantial profit later in the day, enliven the financial press. Cocktails parties are made merrier by the game of "whose-house-has-increased-the-most-in-value." Surely we are witnessing the final stages of a house-price bubble.

Well, not so surely. Perhaps we are seeing only "a little froth in the market," to borrow the phrase used by Federal Reserve Board Chairman Alan Greenspan in his recent speech to the Economic Club of New York. The man who is famous for saying that if anyone understands what I am saying, I must have misspoken, handed down this model of clarity, "Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern." Froth, it seems, consists of "a lot of local bubbles." Meaning: In some areas prices are due to come down, but there will be no nationwide collapse in house prices.

So spoke the man who finds it a "conundrum" that his repeated increases in short-term interest rates have failed to prevent rates on 30-year mortgages from falling from 6.30 percent to 5.71 percent in the past year. Or to cool what everyone is now calling a "red hot housing market."

Last month, sales of existing homes rose 4.5 percent, and single-family homes commanded a median price of $203,800, a jump of 15 percent in the past year. That's the fastest rate at which prices have increased since 1979. New homes are also selling at a torrid pace: sales in April were up 13.3 percent over last year, and the median price rose by 3.8 percent. Little wonder that builders increased privately-owned housing starts by 11 percent in April from the March levels, and stepped up their applications for permits to build still more homes.

What worries some analysts is not only the speed with which prices have been rising, but the way Americans have suddenly begun financing their purchases. Until recently, the typical buyer sought a fixed-rate, 30-year mortgage that set total monthly payments at an unchanging, predictable, and affordable level.

Times have changed. More and more Americans--two-thirds of new buyers, by one estimate--are opting for variable rate mortgages, or choosing to pay only the interest due in the early years, leaving repayment of the loan for a later date.

This stores up two kinds of trouble. First, if interest rates rise, so will the required monthly payments. Second, after the first five years, the borrower must start to repay the principal, which just about doubles his monthly payments. Unless, of course, an increase in the value of his house allows him to obtain a new, interest-only mortgage.

More worrying to those who see a bubble in America's future is the willingness of homeowners who have built up equity in their homes to borrow against that equity, either to finance a spending spree or to invest in real estate. Economy.com estimates that Americans borrowed some $705 billion against their homes last year, up from $266 billion in 1999.

But before deciding that the housing market is another example of the bubbles that are scattered through history--tulip bulbs in the 17th century, John Law's Louisiana land scheme and the South Sea bubble in the 18th century, share prices in America in 1929--consider this: House prices have not fallen in any year since the Great Depression.

There is a reason for this. Despite the emergence of some investors who have become the equivalent of day-traders in shares, most homeowners live in the properties they purchase. When prices ease, there is no mass dash for the exit, as with tulips and shares. So a fall in prices does not result in a sudden increase of the supply on the market.

Furthermore, and despite an increased flow of funds into markets by investors rather than occupiers, many property markets are local. A bust in the market for Florida condominiums, where speculators are active, need not have an effect on house prices in rapidly growing Nevada. And hard times for investment bankers have in the past caused a lull in the upward movement of prices in New York, without affecting property values in Phoenix.

Perhaps most important is the strength of the underlying demand for houses. Newcomers to America are providing a boost to demand at the "starter home" level. More affluent Americans are buying second homes. A jobs market that has created new jobs for 23 straight months is giving consumers confidence and, equally important, paychecks with which to pay for first or bigger homes. Those paychecks have benefited from unexpectedly large increases in worker income: up 10.4 percent in the fourth quarter of 2004 and 6.9 percent in the first quarter of this year.

Does this mean that perpetual double-digit increases in prices are assured? Certainly not. Does it mean that prices might never decline? Of course not. They will react negatively when mortgage rates rise significantly. Will some homeowners who are over-extended find themselves in financial difficulty, and face foreclosure? Very likely.

But for most homeowners, a decline in the value of their homes would only reduce the gains they have made since purchase, and perhaps make them rein in their borrowing as they feel less rich. They will still have the same place in which to live, and if they plan to trade up, or down, will find that although they can get less for their house, they will pay less for the house they buy. In short, there is life even after a bubble. After all, the dot.com bubble burst, but we still have the Internet.

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.

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