The current mantra among economists, generally of the optimistic persuasion, is that the U.S. economy will continue growing because consumer spending is strong and that consumer spending will hold up because of the strong housing market, fueled by Federal Reserve Chairman Alan Greenspan’s seven interest rate cuts since January.

As usual, they are too optimistic. The housing market, like the stock market if to a lesser degree, has risen too far and is due for an unpleasant downturn.

The long stock market boom of 1982-2000 has appeared for the last few weeks to be unraveling further, with the second stage of bubble deflation proceeding at a gentlemanly and unfrightening pace, albeit punctuated by alarms when adverse economic statistics are announced, such as the unemployment report Friday. The decline will grow swifter, possibly, as suggested here last week, in the month of October, a traditional time for stock market alarms. Certainly Trimtabs.com, which tracks stock market liquidity, was heavily pessimistic in its September 3 weekly report; its very short-term perspective on market prospects in this case agrees with my long term, “bottom-up” perspective.

Consider first the National Association of Home Builders’ “Housing Market Index.” This is an index of how “hot” the market is; it is affected by the number of buyers per property and the rate of increase of prices rather than by the absolute level of prices themselves. It therefore tends to lead the price cycle somewhat. For example, in the 1980’s, the HMI peaked at an average of 60.1 in 1986, and then began to fall back gently, to 56 in 1987 and 53.2 in 1988, before dropping more rapidly and bottoming out at 34.3 in1990.

House prices, on the other hand, in terms of the mean price for a new home, rose by 11 percent in 1986 and continued rising rapidly until 1989, after which they slowed and then dropped back somewhat, reaching their 1989 level again only in 1994.

This was the “housing crisis” of the late ’80s and early ’90s In absolute terms, it was not very severe; the drop in annual average in new home prices, from top to bottom, was less than 4 percent, from 1990 to1992.

Regionally, it was worst in New England and California, with prices in the Midwest and the South continuing to rise gently throughout the “crisis.”

One interesting housing market statistic is the difference between the mean and median new house price. Because the very high prices at the top end of the market affect the mean (average) house price, but not the median (the price of the house exactly in the middle of the market) the mean is always higher than the median. The percentage difference between the two fluctuates, however, and is a measure of the inequality in the housing market; if the housing market at a given date is very unequal, the difference between the mean and the median house price will be high.

There is a clear cyclical trend between strong and weak housing markets, which is demonstrated by the mean/median differential in new house prices from 1978; the minimum differential of the series was 14 percent in 1979 (the second oil crisis) and16 percent in 1993; the 2000 level was22.4 percent, only slightly below the 22.9 percent of 1988.

Regionally, the effect is even more marked; looking at existing house prices, where the samples are larger, and where nationally the mean/median differential was just a little higher than for new prices from 1989 to 2000, the South and Midwest have more or less constant differentials, the Midwest lower than the South, while the Northeast’s differential has increased hugely in the last decade, from 9.5 percent in the nadir of 1990 to 32.2 percent in 2000. Interestingly, Northeast house prices, the highest in the nation in 1989, have increased by less than 10 percent in terms of the median existing house price, while western prices have rocketed up by almost 50 percent over the same period.

In recent years, the HMI soared way above its 1980’s peak, reaching an average level of 73 in 1999, before declining gently in 2000-2001, albeit with an upward tick to 62, still above the 1986 average, in August 2001; this was probably due to 2001’s interest rate cuts.

Optimistic economists will argue that today, housing is more” affordable” because of lower interest rates. This argument is both true and spurious; the 30-year Treasury bond does indeed yield less than 5 percent today, but that is a result of the Fed’s interest rate cuts; inflation-linked bonds have declined in yield in parallel with those on conventional bonds, indicating that money today is exceptionally loose, and real interest rates at an all time low. This cannot last; the last period of money interest rates at these levels was the 1950s, a period when house prices did not in fact rise much, because overall inflation was low. Real interest rates will rise, either through a fall in bond prices and a rise in interest rates, or through a fall in inflation; either way, the housing market will be put under pressure.

So, where are we? The HMI has repeated its mid-1980’s pattern, and if the 1980s trend is followed, it is indicating a much lower figure ahead, which will be followed by a period of declining house prices. Inequality in the housing market is at record levels, while West Coast prices have raced ahead of those on the East Coast and in the nation generally.

The slackness in the real economy has yet to have an effect on the housing market, but that effect cannot be long delayed; the market has been propped up in 2001 only by artificially low long-term real interest rates.

Hence the future trend is clear. Further slackness in the economy, with accompanying increase in unemployment, will cause a slackening in demand for housing toward the end of this year.

This market slackness will be apparent both at the low end, driven by rising unemployment, and at the high end, driven by stock market declines and the lack of the previous huge stock option profits for upper management. In turn, the market slackness will reduce consumers’ borrowing capacity, particularly for those who have been borrowing and spending most, and will cause consumer spending, and the economy as a whole, to enter a lengthy period of retrenchment.

With house building having run at record levels in 2001, this will inevitably cause a crisis, with huge inventories of empty houses, particularly at the top end. This in turn will cause further price drops, and a sharp fall in the HMI index to levels similar to those of 1991. A prolonged period of stagnant house prices overall is in store, with actual price falls, some of them up to 30-40 percent in high-end housing, particularly on the West Coast, and to a lesser extent on the East Coast.

Best buy: Middle class housing in Texas, where prices are still relatively low after the crash of the late ’80s, and the economy is boosted by high energy prices and a high immigration inflow (which produces demand for the bottom end of the housing market, provided the local economy is strong enough for the immigrants to find jobs.)

Worst buy/best short: Silicon Valley, Seattle and Boston/New York high-end property. These areas are particularly affected by the tech crash, and have relatively low immigration (some of which, on H1B visas, will probably return home as jobs disappear.) In addition, these areas have benefited most from the tech/investment banking bubble economy of the late 1990s (though in Boston and New York, this only allowed high end real estate prices to recover in real terms to the already absurd levels of the late ’80s).

You have already seen a significant portion (though in my view less than half) of the 2000-2001 drop in stock prices. The house price deflation of 2001-2002 has yet to begin but will be equally devastating to the economy as a whole.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.