NEW YORK (CNN/Money) - Hot housing market -- three words that lately go together like sexy Hollywood starlet, shoddy accounting practices and shaky stock market.

But maybe "hot" isn't strong enough. Try sizzling, or soaring, because mortgage applications are, well, going through the roof.

The Mortgage Bankers Association reported Wednesday that its Purchase Index jumped 18.9 percent to a record 414 in the week ended May 31 from a week earlier.

Why the latest surge? Probably because the 30-year fixed mortgage rate has been below 7 percent for eight weeks in a row and folks who didn't sign on the dotted line the last time rates dipped this low are picking up their pens now. It can't hurt that the papers have been full of stories about a housing bubble and rip-roaring price increases in popular areas. Gets those fencesitters going.

The low rates also are encouraging more people to refinance: That MBA index jumped more than 6 percent last week. Refi's are good for the economy to the degree they cut monthly mortgage payments and give people more money to spend. Yes, bears argue that too many people are taking equity out of their homes to buy boats, new kitchens or fancy vacations when they should be thinking about retirement -- but that's another story.

All in all, the economy has gotten a huge boost from total housing activity, which includes housing construction, remodeling, home-related purchases AND the increase in wealth from higher home prices and growing homeowners' equity. Mark Zandi of Economy.com estimates in a report released Wednesday that housing contributed one-half of one percentage point to last year's increase in real gross domestic product -- that's nearly half of 2001's total increase.

Total home sales (new and existing) hit a record 6.2 million units last year and in recent months are running at an unprecedented 7 million unit annualized pace, the report says. As recently as 1996 home sales had never exceeded 5 million units, so this is quite a record. No wonder that close to 68 percent of U.S. households now own their own home, up from 64 percent as recently as 1994. No wonder either that real home prices (adjusted for inflation) rose nearly 7 percent last year. Over the past quarter century prices have risen more than that only once, in 1978, Zandi notes.

Big question: Can the housing boom continue? Most economists I speak to are optimistic. Price increases are expected to slow this year, but certainly not stall. That will keep people from getting priced out of the market and continue to make homeowners wealthier, which is good for consumer confidence. The labor market is expected to improve gradually as the economy recovers, and having a job is at the top of the list of would-be homebuyers' concerns.

Mortgage rates could move up this year as the economy bounces back. But Dave Berson, chief economist of Fannie Mae, says he doesn't think they'll move up much because inflation expectations are low now, and as the economy gets stronger the Fed will raise rates enough to keep those expectations low. He notes that as recently as the first half of 2000, the 30-year fixed rate was around 8.5 percent and the housing market remained strong. So he believes it would take a pretty hefty boost in rates to cool off housing, and the economy won't be strong enough to make that happen this year.

There are risks, however. If the labor market doesn't get better, incomes don't improve, mortgage rates rise more than expected, and rising home prices cause demand to cool off, then housing activity could pull back, rocking a solid foundation of the economy.

On the other hand, a labor market that turns too robust could cause problems. That's why we are watching the new claims for unemployment benefits, out Thursday, and the Big One, the May employment report on Friday, so closely. If those numbers are better than expected for a couple of reports in a row, then bond investors may start getting nervous. And if bond yields rise, mortgage rates will, too.

Kathleen Hays co-anchors Money & Markets, airing Monday to Friday on CNNfn, and appears throughout the day reporting on the economy and how it affects financial markets. As part of CNN's Business News team, she is also a regular contributor to Lou Dobbs Moneyline.