NEW YORK (CNN/Money) - Throughout a record two-year run for the U.S. housing market, pundits have warned that home prices were over-inflated and ready to pop, soaking millions of homeowners and the broader economy.
But every month brings new evidence that the housing market's skin is thicker than it looks -- it's turned out, in fact, to be one of the economy's staunchest defenders, and seems likely to serve and protect again in 2003.
On Tuesday, the Commerce Department said new home construction jumped in December to the highest level since 1986. That would be a problem for the long-term health of the housing market if people weren't buying all those new houses -- but people are buying those houses.
The Commerce Department's report next week on December new home sales will almost certainly confirm that sales set a record pace throughout the fourth quarter -- even as the rest of the economy ground to a halt, with gross domestic product (GDP) growth nearly stalled, according to many estimates.
"[Tuesday's housing-start] numbers support our view that residential investment likely rose by about 5 percent [on an annual basis] in the fourth quarter -- perhaps enough to make the difference between positive and negative GDP," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a research note.
Though residential real estate activity makes up less than 8 percent of total U.S. GDP, a strong housing market has helped economic growth in other ways.
For one thing, super-low mortgage rates and surging home values have fueled a refinancing boom that's helped homeowners get lower monthly mortgage payments and cash in on a sudden bonanza of home equity.
The refi boom -- which is likely near an end -- has fueled consumer spending, which makes up more than two-thirds of GDP.
And when people buy houses, they often buy furniture, paint brushes, lawn mowers and an armada of other consumer goods to pretty up those houses.
Even homeowners who haven't refinanced or bought a new house have enjoyed the "wealth effect" of higher home values, counteracting the "poverty effect" of a three-year bear market in U.S. stock prices.
"A typical household in the past two years saw about a $20,000 gain in equity," said Lawrence Yun, forecasting economist at the National Association of Realtors. "That's not an insignificant chunk. Homeowners see that wealth and use it to buy additional goods."
Yun and many other forecasters expect a 3 or 4 percent fall-off in home sales in 2003. But sales of existing homes -- 85 percent of the total residential market -- easily set a new record in 2002, and new-home sales came close to a new record.
A 3 percent drop in sales, in other words, will still produce a near-record year -- meaning the economy likely can count on housing for more help in 2003.
"Housing will continue to be one of the economy's pillars, but it can't do it alone," said John Davidson, CEO of PartnerRe Asset Management Corp.
Businesses, which have long been reluctant to spend money and hire workers, will need to get on the ball in order to really encourage consumers, who are growing more cost-conscious by the day.
Still, even if housing helps the economy only a little, policy makers at the Federal Reserve, in Congress and in the Bush administration are likely grateful for all the help they can get.
"Given the condition of housing, [Fed policy-makers] will not panic if they see a low GDP growth rate [in the fourth quarter]," said Joel Naroff, president and chief economist at Naroff Economic Advisors.
The biggest cause of a housing-market cool-down will likely be rising interest rates. The average rate for a 30-year mortgage hit a new record low of 5.69 percent in the week ended Jan. 2, according to the Mortgage Bankers Association of America (MBA); most economists would be stunned if mortgage rates got much lower than that.
Economists think interest rates will rise because they think economic activity will rise this year. If tensions in Iraq are quickly and easily resolved and a big stimulus package gets passed through Congress, the economy could suddenly be swamped with stimulus, pushing interest rates ever higher as debt investors seek greater returns to keep up with rising inflation.
But even if mortgage rates were to gain a full percentage point, to 7 percent or higher this year, the housing market seems unlikely to suffer too much.
"Even if inflation pushes rates to 7.5 percent, that's still not a lock-out rate," said MBA Chairman John Courson, who's also CEO of Central Pacific Mortgage Co. in Folsom, Calif. "With higher rates we'd also have greater economic activity, and more real estate activity."
Greater economic activity also will help incomes grow. One reason people have been worried about a real-estate "bubble" is that the growth in home prices has outpaced income growth in recent years. A surge in economic activity could reverse that trend.
"Between 1980 and 2002, home prices and incomes have [on average] increased at the same percentage, so there have been many years when incomes outpaced home prices," said Yun of the NAR. "The recent price increases have been more of a catch-up to past years."