Housing bubble may be illusion, but choices are real
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Doug Duncan, chief economist for the Mortgage Bankers Association, says he is "not in the price bubble camp," and wrote an opinion piece on the subject for Bankrate. When rates rise, he expects some local housing markets to slow their pace of price appreciation. Prices might even fall in a few areas on the coasts, but not nationally, he says, because housing simply isn't a national market.

The case for the bubble
Baker, the sponsor of the bubble essay contest, dismisses the arguments put forward by Croke, Duncan and others. What is driving the rapid increase in house prices "is the belief that the price will rise more," Baker says. People buy $300,000 houses on the belief that they will soon be worth $400,000.

"They're looking at their houses as a source of return," he says. "I think it's probably in general a bad idea for anyone to buy a home with the expectation that it will go up. But when you're looking at it given current price levels, I think it's a bad idea. It's almost certainly not going to happen."

The economy has been sustained during this slow economic recovery by consumers borrowing against their home equity to buy things at low-rate, tax-deductible interest. "People are borrowing against their homes because they're confident that in three or four years they'll be worth 20 or 30 percent more," Baker says. "At some point, there's only so much that you can borrow against your home."

Baker believes that a bubble will pop eventually, and the overall value of the nation's housing stock will decline 15 to 20 percent over a period of years. He thinks the financial carnage will be worse in places where prices have been rising fastest -- he names New England, the District of Columbia, New York City and environs, much of California, Seattle and Portland, Ore.

Baker's advice? "I would really discourage someone from buying in a bubble market today." He believes that many of today's buyers will "get nailed."

The folly of market timing
When Anthony Hsieh, president of HomeLoanCenter.com, hears arguments such as Baker's, his voice rises. He believes that Baker dispenses terribly harmful advice. What Baker advocates, according to Hsieh, is market timing -- a tactic that is bound to fail in the long run.

"Some of the brightest brains on Wall Street can't time that market right," Hsieh says. "As a regular homeowner that buys a house every five to 10 years, what makes you think you're going to time the market right?"

Hsieh disagrees that people buy their primary residences with the aim of making a profit on the resale in just a few years. "If you want to make money, go short a stock," he says. "People have got to understand that the first objective for buying a house is for someone to have a decent habitat for themselves and their family. If people have another reason besides that, they need to talk to themselves a little bit."

If you buy a house for $200,000 and the value declines to $180,000, he says, "So what? It's not going to be any less warm. If there is a bubble and house prices go down 5, 10, 15, 20 percent, you live in the same house with the same monthly payment."

Sure, home prices will go through an "adjustment period" as mortgage rates rise, but that doesn't necessarily mean a price drop, and certainly not nationwide, Hsieh says. If prices level off or decline, that's no reason to sell one's house.

If Hsieh and Baker and their allies agree on one thing, it's that a homeowner's primary residence is a shelter and shouldn't be regarded as a short-term investment. It's rational to assume that the house will be worth more in 10 years and risky to count on 20 percent appreciation in a year or two.