Will higher rates sink the market?

Super-low interest rates, driven by an accommodative Federal Reserve and a long stretch of sluggish economic growth, have helped keep mortgage rates at historic lows, encouraging a housing boom.

Home sales have encouraged consumer spending on furniture, building supplies and other household products, and mortgage refinancing has allowed many homeowners to lower their monthly payments and tap into some of their swollen home equity.

Interest rates rose in the late summer amid signs of an economic pickup, leading many economists to believe the red-hot housing market would cool off. But rates have stayed low through the fall, and demand for homes has consistently defied expectations.

 "Even though [mortgage] rates have been up a little bit, they're still, from a 30- to 40-year perspective, at historic lows," Doug Duncan, chief economist for the Mortgage Bankers Association of America, told CNNfn. "It's still a great purchasing environment for people who want to get into housing." And many economists think rates are likely to stay relatively low for some time, with the Fed promising to keep its key short-term rate at the lowest level since the Kennedy administration through at least the spring of 2004.

But some economists worry that the Fed is behind the curve, saying that inflation expectations will gather steam, forcing interest rates higher to keep up and eventually forcing the Fed raise rates more quickly than it would have liked. "In this environment, the longer the Fed holds real short-term interest rates below zero, the more inflationary pressures will increase, and the higher the Fed will be forced to lift rates when it finally tightens," Brian Wesbury, chief economist at Griffin Kubik Stephens and Thompson, said in a research note this week.

John Talbott, a visiting scholar at UCLA's Anderson School of Business and author of "The Coming Crash in the Housing Markets," has warned that such a scenario would trigger a devastating collapse in home prices. Most economists, however, still believe the increase in interest rates will be more gradual and that the housing market's eventual decline will be orderly. "By early next year we expect starts to have begun to decline, though activity can probably remain close to current levels for another couple of months," said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd.