It’s a fact that home price increases far above the norm are just that: far above the norm. That’s why it’s only natural to expect that sales activity might slow in the coming months and that, as interest rates rise, there may be a slow down in the housing industry.

But the big question is this: will there be a housing market crash or will the real estate industry be blessed with some sort of "soft landing?" Should we all be worried about the future of what may be our largest investment?

Of course, no one can know in advance what will happen, but there are a number of reasons to think that 2005 will be a relatively good year for the housing industry.

Here is a look at some of the issues to consider:

Q: Some on Wall Street claim that there is a housing "bubble" which must eventually burst. Aren’t you worried?

A: These same claims have been made for the last thirty years by Wall Street analysts, who are used to boom and bust cycles seen in the stock market. In contrast, real estate tends to be a slow and steady performer, with the vast majority of purchasers using the home they purchase as their residence. This fact has a stabilizing influence on the overall housing market.

Q: But with interest rates rising, isn’t it going to be harder for people to buy a house in the future?

A: Yes, but interest rates are still hovering around 6%, and we can hardly say that the cost of financing is preventing the average American from buying a home. The truth is that interest rates are lower now than they have been for most of the past twenty years.

I specifically remember selling houses in the early 1980's when long term fixed interest rates were in the high teens, and many purchasers chose negative amortization mortgages in order to afford their home. We are much better off than those days.

Furthermore, the Federal Reserve has shown us rate increases that are slow and measured as a means of preventing inflation. Experts are predicting that fixed rate loans will still be less than 7% during 2006, and that this may actually have a positive effect on the housing market.

Q: How could higher rates help?

A: When rates were in the 5% range, ownership costs were so low that housing demand actually exceeded available supply. In some markets, prices jumped as much as 30 percent in just a year.

While these price gains are unsustainable from year to year, they fueled speculative buying. According to a study performed by the Realtors organization, almost 25% of all residential homes purchased in 2004 were for investment purposes.

If interest rates rise into the 7% range, my guess is that fewer buyers will purchase just in hopes of seeing a price rise in the future. Remember that the carrying costs rise with each increase in interest rates. That will help relieve some of the pressure this market has been experiencing. And that relief can allow a better balancing of supply and demand, especially in some of the hottest markets in the country.

While the Atlanta real estate market took a breather last year and saw an average gain of only 5% during 2004, a record number of metro areas across the country saw double digit price gains last year.

So a controlled rise in interest rates may actually be good for the market.

Q: But what about the economy? Aren’t we in trouble there? Won’t that hurt housing?

Actually, the underlying fundamentals of the real estate market are excellent for 2005 and beyond.

Experts expect demand to remain strong for several reasons:

* As long as interest rates remain below 10%, housing will still be affordable to the average American household;

* Immigration, legal and otherwise, has produced a large number of unexpected home buyers in recent years, and is likely to continue;

* Continued pressure from Congress is expected to make it easier than ever for first time buyers to make their home purchase; and

* this economy is creating jobs, and that is the number one driver of the national housing market.

Finally, while the housing market is expected to slow this year, the results may still be historically strong. In other words, the Realtors group is predicting that 2005 will be the second best year on record for new and existing housing sales, just 4% to 5% behind last year’s record pace.

Q: Are there any segments of the Atlanta market you are concerned about?

A: I have a nagging fear that as interest rates rise, those with adjustable rate loans may find their payments increasing.

Now might be a particularly good time to refinance and combine your adjustable rate or LIBOR-based first mortgage and your floating home equity line into a single 30-year fixed rate instrument.