Strong equity
Nor are Drew and her colleagues worried about the rise in interest rates, which given the popularity of adjustable-rate mortgages—often taken out by home buyers who needed the low "teaser" rates that are a feature of most ARMs just to qualify for a home—would suggest that many recent purchasers are going to see a sharp increase in their monthly mortgage. Drew notes that the majority of Americans either have fixed-rate mortgages or own their homes outright (mostly retirees).

Most ARMs are structured with a fixed rate for the first five or 10 years, so most of those adjustable rate notes won't begin resetting until sometime later this decade. Indeed, Harvard researchers concluded that only about 6 percent of homeowners have a mortgage that will reset at a higher rate sometime in 2006.

And even if housing prices fall, the bulk of homeowners will be above water with their mortgage. Drew & Co. notes that as of 2004, the most recent year for which data is available, roughly 3 percent of all homeowners have less than 5 percent equity in their house, and a whopping 87 percent of owners have 20 percent of more equity in their home. So fears that a small downturn could turn into a wave of panic selling by homeowners who are suddenly upside-down are overblown, says Drew.

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Plenty of skeptics
There are plenty of economists who are more skittish about the housing outlook. Jan Hatzius, an economist at Goldman Sachs & Co. said in an interview that he's concerned about the growing number of unsold homes on the market, which he fears could eventually trigger a downturn in prices that could crimp spending by consumers. Hatzius notes that the National Association of Realtors' measure of existing home inventories was up 33 percent year-over-year through late April.

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Cool housing market offers opportunity

His analysis of real-time indicators, such as the number of homes for sale on the NAR's Multiple Listing Service, show that inventories have risen another 10 percent just in the past six weeks. "The increase in home inventories shows no signs of abating," he says. "We would be very careful before concluding that the housing market is in a soft landing." If the trend continues into next year, which Hatzius thinks is conceivable, that could result in a 6 percent decline in real home prices, he notes.

To be sure, Drew notes that the Harvard study was based on the state of the market at the end of 2005 and admits her optimism has been tempered a bit by the slowdown that's occurred so far this year. "The first-quarter numbers showed the housing market slowing a little faster than we expected," she readily admits. But for the most part, she stands by the conclusions of the report.

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