The start of each year is prime time for economic pessimists, who try to persuade us that terrible things are about to happen. A perennial favorite is the specter of a "housing bubble" about to burst, with a supposedly devastating impact on household wealth. This theme has been repeatedly recycled since June 2002 by bearish economic forecasters such as Ed Leamer of UCLA and Stephen Roach of Morgan Stanley.

 And the same scary story has proven handy for policy wonks who abuse it to rationalize their agendas, such as lecturing the Fed to keep interest rates too low or lecturing Congress to push tax rates too high.

 Although the overworked analogy between housing and tech stocks sounds dramatic, it is quite preposterous. "The downside of this (housing) bubble," said Roach in December, is "potentially far worse than that of the equity bubble." Really? After March 2000, the NASDAQ stock index plummeted from about 5000 to 1000.

 Does Roach mean to imply that $500,000 houses might likewise drop to $100,000? Not likely. What he apparently meant by calling housing "the biggest asset bubble of them all" is that he believed (incorrectly) that Americans' equity in homes was "almost double their total equity holdings."

 From 1999 until the third quarter of last year, according the Federal Reserve, the value of households' real estate rose from $10.3 trillion to $16.6 trillion. But the value of their stocks and mutual funds dropped from $12.2 trillion to $9.6 trillion. After subtracting mortgages, however, owners' equity in housing was only $9.3 trillion, up from $5.8 trillion in 1999.

 A July 2, 2002, Wall Street Journal editorial on this topic worried that "home buyers are resorting to greater levels of mortgage debt." Contrary to such anxieties about homeowners being over-leveraged, their equity exceeds 56 percent of the value of homes and that ratio has not declined. Mortgage payments often replaced rental payments as home ownership increased, but that was not an added burden.

 The New York Times recently asked, "If Home Prices Plunge, Will Damage Be Worst in Democratic States?" What that story and others show is that huge increases in home prices were mainly confined to hot spots in California, Florida, Nevada and New England.

 "In metro New York, the median price of a single-family house is up 78 percent since 1999," notes Business Week; "The gains are even bigger in Miami (87 percent), Los Angeles (97 percent) and San Diego (115 percent)." Aspiring sellers of high-end homes may be hoping for too much money in such areas, where building has been restricted by land scarcity and regulations. Yet housing remains affordable in most of the country.

 An index from the Office of Federal Housing Enterprise Oversight (OFHEO) shows that over the past five years prices of resold homes rose by 108 percent in Sacramento, but less than 20 percent in Indianapolis. Talk of any national housing bubble is meaningless. Talk of any national drop in home prices that might exceed what happened to tech stocks is madness.

 Since 1985, the OFHEO price index never failed to increase for longer than a single quarter at the national level, despite recessions in 1990 and 2001, and mortgage rates that sometimes exceeded 10 percent. David Lereah, chief economist for the National Association of Realtors, notes that the worst previous home price declines on record were in Los Angeles (21 percent) and Houston (23 percent). But that was because of huge local job losses of 8 percent to 10 percent.

 To match that at the national level would require an unemployment rate of 8 percent 10 percent. If any housing bust zealot is predicting the unemployment rate may double, we would certainly be amused to hear the explanation.

 There is no more reason to expect house prices to always rise at the same pace as median incomes than to expect stock prices to rise at the same pace as computer prices. Housing is a long-term asset that provides an alternative to rent. But housing is also an alternative investment to stocks and bonds. Continued...