(FORTUNE Magazine) – Looking to sell your house? You may be forgiven for thinking the market's prospects don't seem so great right now. Since January, the rate on a fixed 30-year mortgage has risen a full percentage point, to 8%. Headlines continue to scream out news of more layoffs at Fortune 500 companies. And even without that kind of job insecurity, the demographics of the traditional homebuying population seem lousy--there are two million fewer Americans ages 25 to 34 than there were in 1990.

Well, don't give up just yet. Despite the recent surge in interest rates, there's little reason to fear a collapse in demand, and therefore prices. Quite the contrary. "Mortgage lenders have become intensely competitive and are willing to shave margins to keep the market rolling," says Mark Zandi, chief economist of Regional Financial Associates, a consulting firm that counts many lenders among its clients. Zandi adds that adjustable-rate mortgages will provide an alternative for many buyers--ARM rates recently averaged 5.8%, 2.2 points lower than the fixed rate.

Such rates may not be enough to propel values as much as in 1995, when according to the National Association of Realtors the median sales price for homes climbed 4.9%, to $113,800. Inflation was just 2.7%. Zandi predicts that this year home prices should keep pace with inflation, about 3%.

But this strong market could get even stronger. Despite their recent run-up, mortgage rates are down from a year ago and low by historical standards. What's more, the fundamentals of the market are favorable, says David Berson, chief economist of Fannie Mae, the nation's largest provider of mortgage funds. Berson acknowledges that the arrival of the baby-bust generation means less demand. But he argues that the gap is being filled in part by large numbers of immigrants who came to the U.S. in the 1980s and can now afford their first house. The other important boost to demand is coming from what Berson calls "late-buying baby-boomers," who have resisted growing up as long as possible and are only now getting interested in such adult trappings as marriage, kids, and, yes, houses.

Sharply rising ownership rates bear out Berson's thesis. According to the Census Bureau, the percentage of American households that own their homes fell in the first half of the 1980s as boomers held back. Then the share grew slowly until 1995, when it took off; by the fourth quarter, 65% of all U.S. households were owners, the highest level in 14 years. If Americans' preference for owning rather than renting continues to grow, home prices could appreciate a full percentage point more than inflation through the rest of the decade, says Berson.

A point over inflation may not sound like much. But buyers typically borrow heavily to finance their castle, so a little appreciation goes a long way toward a better return. And consider this: In real estate's go-go era, from 1982 to 1990, the median value of a U.S. home rose 4.4% a year, just a half point above inflation.

Of course, nobody lives in the national market. Denizens of the Northeast have a right to feel glum. Prices this decade have generally stayed flat or gone down, and little relief is in sight. Fannie Mae's Berson, who lives in the Washington, D.C., area, speaks from personal experience: "The problem in my neighborhood is the problem of the whole Mid-Atlantic region--financial institution mergers, declining government spending, and layoffs at companies like AT&T."

Californians, however, have reason to hope. Home prices did continue to decline last year, but analysts think the bottom has been reached. Forecasters at UCLA predict that the state's economy is generating enough demand this year to push prices up 3%, which would be the first increase since 1990. Nonetheless, the champagne will likely remain corked, especially among the Dom Perignon set: In the past five years the typical house has depreciated 20%, and according to First Republic Bancorp, Los Angeles houses fetching $1.6 million in 1990 can now be had for a mere $1.1 million.

That's what happens when speculative bubbles burst. By contrast, most of today's hot markets are hot for sound reasons. Homes in Salt Lake City, for example, appreciated 17% during 1995. Not to worry. Besides enjoying a vigorous economy, Salt Lake offers little good land to build on. "The new subdivisions are in areas that were deemed unsuitable before and are costly to develop," says Jim Naccarato, president of the Wasatch Front Regional Multiple Listing Service.

Where's the best place to sell? Perhaps the Midwest, which was left to rust in the dust in the 1980s. Prices in the Detroit area rose 15% during 1995; they were up 11% in Cleveland, 13% in Akron, and 18% in South Bend, Indiana. Reasons? "Exports from the Midwest are awfully strong," says economist Diane Swonk of First Chicago NBD. "Job security in heavy industry has been increasing, wages are up, and Detroit is enjoying its strongest economy in a quarter century." Swonk's only caveat: She frets about overheated prices in Chicago's affluent northern suburbs, where she lives. For she knows what many Midwesterners, lacking experience, do not: In real estate you can have too much of a good thing.

Reporter Associate Tricia Welsh