NEW YORK (Fortune) -- These days, Wall Street is totally obsessed with the wrong news: The latest flash on inflation. When the CPI jumps, investors bail. When prices slump, they rejoice. It's that simple.

But it's not what counts most. Stockholders, and homeowners as well, fear that rising inflation will force Fed Chairman Bernanke to hike short term rates, and that's true. But what really matters for the value of your investments, from your 401K portfolio to your three-bedroom colonial, is what's happening with real interest rates - what borrowers are paying adjusted for inflation.

To chart where asset prices are going, watch real rates. If history is any guide, they are practically bound to rise, whatever happens with inflation. So, investors, fasten your seatbelts. It's going to be a bumpy ride.

Let's start by defining the real rate. It's the risk-free yield on treasury bills or bonds minus current inflation. When real rates drop, investors and homeowners get a big gift. Their incomes keep rising with inflation, but their adjustable mortgage and credit card payments drop, so they can put more money in their pockets.

It's the same with companies: They pay less to borrow money for new plants, labs or inventories, so margins on their cars or computers improve, fattening profits. But when real rates rise, the windfall turns into a deadweight, sapping household incomes and hammering profits. The result: An increase in real rates triggers a decline in the prices of all assets, from houses to stocks, - if not now, then in the near future.

Right now, the pendulum is swinging the wrong way for investors. America is shifting from an exhilarating era of falling real rates to a grinding, sobering climb back to normal levels.

Starting in 2001, Fed Chairman Greenspan took extraordinary action to keep the economy afloat following the stock market collapse. He rapidly cut the Fed Funds rate from over 5% to just 1%. That sent the real, short-term interest rate from a positive 1% to a negative 1% to 2% from 2001 to 2004.

In other words, prices were rising far faster than the interest consumers and businesses paid on short term loans. It made sense to borrow, and that's just consumers did. They gorged on loans, especially mortgages.

Greenspan's gambit was remarkably successful: Consumers borrowed against the huge increases in their home prices, and used the money for vacations, cars and tuition, keeping the economy humming. But it's hangover time. Our temples are just starting to throb.

The problem is two-fold: First, the decline in rates started a boom that took on a life of its own, evolving into an irrational, speculative frenzy. From 2001 to 2004, housing prices rose 25% adjusted for inflation. Housing prices have two main components: Land costs, and real rates.

Normally, land costs should rise at around 1.5% a year, tracking the rising wealth of Americans. Over those four years, the reduction in real rates and the regular, upward trend in land values explain only about 15% of the 25% increase in housing prices.

After 2004, the situation became far more perilous. Real rates began rising again in 2004, yet housing prices kept soaring. Since then, real rates have jumped more than two points. With the Fed Funds rate at 5.25% and inflation around 4.3%, they now stand at around 1%. The housing lobby touted the decline in real rates to explain why America had entered a new era of high, sustainable housing prices.

By the same logic, prices should decline when real rates rise - and they haven't. The reason: Loose credit, in the form of adjustable and negative-amortization mortgages blunted the influence of rising real rates, making it easy for homeowners to prolong the borrowing binge.

But the rise in short-term real rates is beginning to take its toll. Adjustable rates are resetting at far higher levels, raising monthly payments and pounding housing prices. That's just the first problem.

The second is that longer-term real rates are still at low levels, and they're bound go to back to normal, as they always do. The real rate on the 10-year Treasury is still just 1%. It's 50-year average is more like 2.8%.

What will make it rise? Quite simply, American corporations haven't been borrowing much the last few years, and they're overdue for new investments in capital equipment. As they pile on debt to make those investments, real rates will jump. And when they do, real estate and stocks will take a hit.

In housing, the long decline is well underway. "Speculators depended on 'the greater fool theory' to sell to new buyers, and woke up discovering they were the new 'greater fools,'" says Robert Aliber, the distinguished international economist who's now retired from the University of Chicago Graduate School of Business.

But what will happen with stocks? Stocks are still pricey. The multiple for the S&P 500 now stands at around 20, well above the average of 14 for the past 50 years. Low real interest rates justify part of that premium.

But what if they rise? If long-term real rates go back to their historic average of 2.8%, multiples would drop to around 15, causing a steep decline in stock prices. Tech stocks, which still boast the highest multiples, would bear the brunt of the damage. So forget the noise on inflation, and stay on the real rate watch. The best time to buy will be after the real rate climb.