(FORTUNE Magazine) - If you want to know where real estate prices are headed in California's Orange County, the man to talk to is Gary Watts. The Mission Viejo broker has 35 years of experience and doubles as a spokesman for the O.C.'s Association of Realtors. But it's his track record more than his resume that has won him serious credibility with his peers. In 1989 he earned the nickname "Scary Gary" by correctly predicting that the housing market in Southern California was headed for a tumble. Then, in 1996, he was one of the first to call the area's rebound. Since 1997, Orange County home prices have seen a 195% rise. Will the good times last another year? Gary doesn't hesitate. "Fifteen percent is pretty much in the bag for Orange County in 2006," he says. "It's impossible for prices to go down this year."

Head 3,000 miles east and talk to almost any broker in Boston, by contrast, and he'll tell you that business has slowed in the past several months. Consider John Ford. Just two years ago, five properties was the most he needed to show a prospective buyer before eliciting an offer. "And then it would be a bidding war," says Ford, who employs 30 agents in three Boston area offices. Today he's averaging 14 property tours before a skittish client is ready to buy.

Half a decade into the biggest real estate boom in our nation's history--and a full two years after pundits began sounding alarms about its coming to a close--the endgame is still unclear. Pick your cliche: Are we in a bubble that's ready to burst, or are we, as National Association of Realtors chief economist David Lereah recently asserted, headed for a "soft landing"? The almost daily drumbeat of national statistics doesn't help sort things out. Is it more significant that we just had a fifth straight year of record home sales, or a third straight month of decreasing prices? "No one really understands how these things behave," says Robert Shiller, the Yale economist and author of Irrational Exuberance, who presaged the dot-com crash and has lately been spending much of his time studying real estate. "Looking for indicators is a little bit futile because we've never seen this kind of growth in housing before."

In fact, the best way to get a handle on where the broader housing market is headed is probably to ignore the national numbers and heed the example of Scary Gary: Stay local, and always follow the inventory. With that in mind, FORTUNE decided to check up on two areas at opposite sides of the country that have seen spectacular run-ups in home prices.

Let's start in Orange County, which has caught a case of real estate fever as acute as that of any region in the nation. Yale's Shiller surveyed Orange County residents last year on what they expected home prices to do over the next ten years. The average expectation was a 23% return--per year! That kind of unbridled optimism has caused buyers to stretch beyond their limits. Southern California has become a hotbed for "exotic" mortgages, such as interest-only loans. "One of the reasons we think this market will start to run out of gas at some point is that you've essentially created as much gold from straw as you can from this financial alchemy," says Scott Simon, mortgage chief at California bond house Pimco.

Recently there have been some signs of weakness. The rate of home price growth has decelerated dramatically, from 25% in 2004 to 14% in 2005, according to DataQuick Information Systems. "It's slowed down a bit since last spring and summer," says Christopher Cagan, director of research for First American Real Estate Solutions. "The real question is whether it's more than just the seasonal slowdown."

Gary Watts insists it is not. His assurance stems from the O.C.'s strong economic underpinnings. Its 3.2% unemployment rate is the lowest in the state. And last year the area ranked fifth in job growth nationally. But Watts's favorite indicator is housing inventory. Orange County has only about a two-month supply (compared with the national average of five months). "That's just going to get sucked up," says agent Debbie Ferrari. It appears that the strength of the local economy is delaying the inevitable slowdown--for now.

Boston isn't quite so fortunate. In the city's suburbs, single-family homes have gushed onto the market. Inventory increased to 4,281 by January, 79% higher than a year earlier, according to MLS Property Information Network. LINK, a company that tracks the downtown market, shows an inventory increase of 61% in the last year. And 2005 foreclosure filings were up 45% in Suffolk County, which includes Boston. Massachusetts was one of just three states in the union to lose population last year--never healthy for real estate, which depends on population growth. Prices are still holding up, but there are no Gary Wattses in Boston guaranteeing another year of gains.

So what does this tale of two markets mean for everybody else? The good news is that although there are definite signs of a long-term slowdown in each market, it appears to be happening gradually, and in each case guided largely by local economic factors. In other words, there's nothing to suggest a Nasdaq-like plunge, with one overheated city taking down every other all at once. "Housing is like a giant supertanker," says Pimco's Simon. "It took a while after they lowered rates to really speed up, and it will take a long time to slow down."

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Leading Indicators

Are Home Prices Destined to Keep Rising?

7,072,000--Number of existing homes sold in 2005, setting a record for the fifth consecutive year

$211,000--Average pricetag for an existing home sold in December

10.5%--Increase in median house price from December 2004

Or Have They Finally Reached the Tipping Point?

8.9%--Decrease in housing starts from November 2005 to December 2005

2,796,000--Number of existing homes for sale at the end of December 2005, a 26.3% rise

from December 2004

4.9--Number of months of new home inventory in both November and December 2005, the

highest level since 1996

19.9%--Predicted average price drop for existing homes in hot markets if there's a

sustained downturn, according to one real estate analyst

Sources: U.S. Census Bureau; National Association of Realtors; Friedman, Billings, Ramsey