(FORTUNE Magazine) – What's going on? Homebuyers used to have conniptions at the merest whiff of a rise in interest rates. Not now. They're still gaily creating a house-buying boom despite the fact that the 30-year-mortgage rate has climbed to 7.88% from 6.79% since the beginning of the year. Nobody seems to care--sales of new and existing homes are at record levels, and house prices are soaring ahead of inflation. But if homebuyers are happily oblivious, the Federal Reserve Board is not. When it meets on Oct. 5 to decide whether to raise interest rates again, it will have its eye on those giddy homebuyers.

What concerns the Fed is this: The housing market has traditionally been one of the most important channels by which rate increases are transmitted to the economy as a whole. So if its rate hikes aren't doing what they're supposed to, the Fed gets nervous.

Let's take a closer look at the house-buying mania. Part of the reason for the boom may be a last-minute rush to buy homes ahead of further rises in rates, but there's more than that going on here. Competition among lenders has changed the market, and the result is that long-term mortgage rates may play a less important role than they used to. Lenders now offer adjustable-rate mortgages, for example, determined more by a bank's short-term cost of funds, and buyers are snapping them up. The mortgage-approval process has become faster and easier because of computerization and the Internet. Then there's a whole new group of homebuyers, in part driven by the federal government's aim to increase the stock of affordable housing. Those who once only dreamed of owning their own home are today being courted by mortgage lenders that require lower down payments and no credit history. According to Fannie Mae's chief economist, David Berson, at least as important as these changes in the mortgage market is consistently high consumer confidence bolstered by growing employment. "Without that," he says, "there would be no housing boom."

But there is a boom, and it's a big one. Suddenly, buying a home has become a great investment--and that's not true just in coastal or Sunbelt hot spots, it's true even in places like suburban Detroit. In 90% of all U.S. metro areas, in fact, real house prices are rising an average of 3% a year. After a 15-year period from 1980 to 1995, when home prices were stagnant at best, any real gains are a major achievement. In some centers, such as New York City, the San Francisco Bay Area, and Los Angeles, where supply can't hope to keep up with demand and demand is driven by phenomenal stock market wealth, real price increases are more in the magnitude of 20% a year. With prices accelerating, homebuyers have come to expect big gains when they sell and are willing to saddle themselves with higher mortgage payments.

This housing boom is so powerful that last year it accounted for close to one-quarter of the economy's real growth. All that homebuying entails a lot of new construction, new kitchens, spa bathrooms, computer rooms, many, many trips to places like Home Depot... "If the housing market isn't weakening now," says Mark Zandi, RFA Dismal Science's chief economist, "then no sector in the economy will be slowing." And a housing boom that shows no sign of abating means long, consternation-filled meetings for the Federal Open Market Committee, which hopes the economy will slow down on its own.

What can only add to the tension in the room when the FOMC meets this month is the fact that the latest economic numbers are awfully confusing. There are some signs that the economy is running too hot--e.g., August retail sales were twice as strong as economists had forecast. Yet during the same month inflation didn't increase at all. Not an easy call. No wonder those Fed officials get such nice offices with fireplaces in them.

But then, maybe the Fed's decision has already been made for it. Even if there are still no signs of inflation, as long as homebuyers continue to ignore rising mortgage rates--and there's no evidence to suggest that they won't--the Fed may be left with only one choice: to raise rates. The question now is, How high will rates have to go before they get the attention of crazed house hunters?

--Anna Bernasek