By Cati O'Keefe In an amazing run, the U.S. real estate market roared through the twin deflators of recession and large wealth losses caused by declining equity values. Home builders, quiet following Sept. 11, have quickly found their collective voice as 2002 indicators continue to rise, triumphantly claiming: "We're immune."

Not so fast, says economist Ian Morris of HSBC Securities USA, author of a newly released report, "The U.S. Real Estate Cycle: The Other Bubble?" To Morris, home valuations are just too rich.

"Everything is going right for housing," says Morris. "People are shifting preference for real estate versus stocks, keeping demand strong. But Fed data on real estate assets compared with income is at the highest since 1989, which was the peak of that cycle."

Morris claims that low interest rates mask the high cost of housing, which allows people to buy more home than they would otherwise be able to afford. "When we do get a recovery," he says, "it is reasonable to expect a rise in rates--and you don't need much of a rise to get a negative impact on housing."

Michael Carliner, an economist at the NAHB disagrees: "Many reports claim there have been huge gains in house prices. Where indices are quoting 9 percent increases, the Census Bureau index shows an unexceptional 3.5 percent increase in 2001."

The argument over whether the recession has flushed out excesses in the housing market hinges on the data source. Many indices have an inherent upward bias: In times of heavy refinance and sale activity, usually the houses that have increased in value turn over, artificially inflating the median price. And many indices don't adjust for the fact that some higher prices homes were remodeled.

Some economists claim that demographic shifts will be the cushion in the impending soft landing. "We learned a nasty lesson over the past 18 months that the business cycle still exists," argues Morris. "Now you hear that immigration and demographics have rendered the housing cycle null, what goes up can come down."

As for the "soft landing" theory, Morris points out that flat growth is still bad. "It's tricky to navigate a soft landing. Growth in home sales prices is now 9 percent. So you lose 9 percent growth momentum, which is a major consumption drag." So even if the NAHB's claim that growth will stabilize at 4 percent is true, a drag still exists.

Regardless of whether housing's lowered contribution is the optimist camp's "less robust recovery" or the pessimist camp's "negative growth," both sides agree that local bubbles exist, and builders need to monitor their markets, versus the national economy, to make prudent business decisions.