“I AM ASKED ABOUT THE HOUSING bubble at least once a day,” Eric Belsky, executive director of Harvard University's Joint Center for Housing Studies, told a conference audience in November. He's not alone: The bubble debate, which popped up in 2002, rages on. Each quarter, it seems, new data and reports both prove and disprove the theory that the housing industry's incredible ride could screech to a halt at any time.

Two groups of economists have emerged on the issue, with one camp pointing to dramatic house price increases outpacing wage increases as evidence of a bubble bound to burst. Others have refuted the bubble theory, arguing that changes in mortgage finance, constrained land supplies, and demand driven by demographic trends will continue to support the housing market's strong performance.

The two factions haven't found much to agree on—until recently. Data have begun to validate suspicions that in some regional markets speculators have pushed demand—and prices—beyond their natural limits. Increasingly, economists discuss the possibility of price declines in a handful of hot markets if investors leave, taking their excess demand with them. Whether those declines happen or price increases simply slow hinges on larger economic trends, namely continued job growth and rising interest rates.

Economic bubbles occur when prices are no longer supported by fundamentals, and consumers are motivated to buy only by the hopes of further appreciation. Technology stocks in the late 1990s created a perfect example of a bubble. The NASDAQ stock exchange doubled its value between the third quarter of 1998 and the first quarter of 2000—bolstered by irrational stock purchases—only to return to its original level 18 months later.

Fueled By Fundamentals You can count among the antihousing–bubble group, Jeff Meyers, president of Hanley Wood Market Intelligence (formerly Meyers Group, recently purchased by Hanley Wood, LLC, publisher of Builder). Even in markets that are described frequently as overheated, such as Washington, Las Vegas, and Southern California, Meyers says basic tenets of supply and demand—restricted land supply, relatively low inventories of homes for sale, job growth, and population growth, coupled with reasonable interest rates—continue to support high prices. “These are not bubble conditions,” he says. “The fundamentals are there for good markets.”

Builders are quick to point to demographic projections as they reject the idea of a bubble. “Over the long term, this is the largest, steadiest market demand any industry can expect,” says Al Hoffman, CEO of Bonita Springs, Fla–based WCI Communities, which targets more affluent buyers. “I don't expect a long-term bubble burst, based on demand.”

Those demographic projections center around three groups: baby boomers, their children (commonly called echo boomers), and immigrants. Builders expect baby boomers to drive the second-home and condo markets during the next decade, while echo boomers and recent immigrants will become homeowners for the first time.

They're particularly encouraged by the Joint Center for Housing Studies increasing its estimates of household growth between 2005 and 2015 to 13.3 million households, based partly on high immigration levels in the 1990s. “We have generally been bullish and optimistic about the [housing] sector,” says Nicolas Retsinas, director of the Joint Center.

And then there's the supply side. Large stocks of developable, affordable land are tough to come by in high-demand areas, particularly on the East and West coasts. Couple that with the time it takes to get the parcels through the entitlement and permitting process, and builders say they can't come close to meeting demand.

“Demand is phenomenal, but the supply is restricted. That's the part of the formula that too many people don't consider. That's the safety net,” says Ara Hovnanian, president and CEO of K. Hovnanian Enterprises, headquartered in Red Bank, N.J.