America's House Party

Home-improvement retailers like Home Depot and Lowe's have particularly benefited. If the housing market is a gold rush, they're selling pickaxes. Greg Bridgeford, executive vice president of business development at Lowe's, says his outfit has been able to sell not just more items but also pricier ones: "In something as mundane as gas grills, our average price was $149. We started bringing in some very, very high-quality grills that priced from $497 to $697 to $997." Says Home Depot's John Costello, executive vice president of merchandising and marketing: "America's love affair with their homes has had a dramatic impact on our success."

As it has generally on the economy. "When people's house value increases," says Belsky, "they feel freer to spend from the wealth they have. You may decide to buy a bigger car, to eat out more at restaurants." And, he adds, people spend those hypothetical riches faster when their houses go up in value than when their stocks do because they believe housing gains are more stable. But that's all well and good, because housing gains are more stable, right? Ahem, right?

• TROUBLE ON THE HOME FRONT?

This is the $64 billion question of the 21st century's first boom: Are today's real estate revelers partying like it's 1999--just before the stock-market bubble burst? To Edward Leamer, economist and director of the UCLA Anderson Forecast, the housing market, especially in hot coastal areas, is a bubble just as ripe for popping. "We've had a more than doubling of housing prices in the past three years here in Southern California, for instance, and there's no fundamental driving it," he says. "There isn't some big crush of people coming to California. That's ridiculous."

Instead, say Leamer and other bubbleologists, what's driving the market is low interest rates, herd psychology, speculation and the expectation of unending price increases. (One study found that Los Angeles homeowners expect their home values to grow 22% every year for a decade.) Meanwhile, promiscuous lenders are throwing money at buyers like beads during Mardi Gras. "Anybody who can crawl in off the street can get a loan with 0% down at three or four times their income," Leamer says.

It's tempting to call real estate NASDAQ 2.0, but there are key differences. David Lereah, chief economist for the National Association of Realtors, predicts another record year for real estate in 2005, with a 9% jump in prices nationwide. Lereah says the run-up in house prices is not built on the kind of hot air that promised that theglobe.com would be the next General Electric. Rather, he says, it is based on fundamentals that include tight housing supply--especially in places where it is tough or expensive to build, like New York City and San Francisco--such population factors as immigration, foreign buyers (snapping up properties cheap because of a weak dollar) and baby boomers' demand for second homes. "It's the demographics, stupid," he says.

Stocks, he adds, are more readily sold and thus more volatile. "Stocks are pieces of paper," Lereah says. "People can get in and out very quickly. Real estate is different. It's tangible. It's secure. So even if the price of the home next door may go down, it doesn't always mean yours will go down too. It doesn't mean you're going to sell. You're not going to react the way IBM's shares would react if there's a big sell-off."