Will the housing bubble burst?

After seven months of searching while home prices climbed ever higher, Jeff Cyr finally made the real estate leap of faith and bought a condo on San Jose's Bascom Avenue for $329,000 -- with an interest-only loan. The 31-year-old grocery clerk did so knowing he might have pulled the purchase trigger at the peak of a bubble. New home buyers like Cyr, financially stretched and hoping for the best, are not alone with their worries.

Some economists have watched the soaring home prices with alarm as well, fearful the steep rise could lead to a plunge. They see a combustible mix of low interest rates, easy credit and rising speculation, coupled with a widely held belief among buyers -- especially younger ones -- that real estate values never decline.

But other economists point to forces that buttress the housing market, at least in the Bay Area, from steep drops. Those include a chronic shortage of homes, a lack of available land for new developments and a willingness of many people to pay what it takes to own a home here. Even the surge in no-interest loans -- viewed by some as evidence of high-risk borrowing -- is seen by others as merely a way lenders can offer borrowers greater flexibility.

Whether or not there is a "bubble'' may depend on how the term is defined. Many economists use it to describe a period when home prices rapidly climb, then go flat or dip a little -- not a price collapse reminiscent of the stock market drop in 2000. But a minority predicts that the steep rise in housing prices will be followed by a steep fall. Robert Shiller, a Yale University professor of economics, probably paints the most dire bubble scenario of all prominent economists when he predicts a plunge in housing prices rather than a leveling off. "I think there is a high inevitability of an eventual fall,'' he said.

PMI Mortgage Insurance, which underwrites mortgages, has grown worried enough to shift its policies to combat increasing speculation in the housing market. The PMI Risk Index, which weighs incomes, mortgage payments and changes in employment, rates Santa Clara County's chance of price depreciation in the next two years at 48.1 percent -- the fourth highest in the nation. It gives the East Bay a rating of 48.7 percent, third highest in the nation; and San Francisco, San Mateo and Redwood City a rating of 39.5 percent, 10th in the nation. PMI has not predicted how much housing prices might drop, but Leslie Appleton-Young, chief economist for the California Association of Realtors, says any decline will be much smaller than the 20- to 30-percent drop that she said would define a true bubble. "Do I think housing prices are going to collapse?'' she said. "No.''

Indeed, most economists, including Federal Reserve Chairman Alan Greenspan, don't believe a housing meltdown is on the horizon. A significant hike in interest rates, coupled with a recession, however, could spell "payment shock'' for some cash-strapped home buyers relying on adjustable rates. While few economists predict a collapse, all agree that the overheated Bay Area real estate market can't continue to sizzle forever.

In March, the median-price house in Santa Clara County was $665,000 -- a nearly 18 percent hike in one year. Prices had shot up 5 percent since just February, according to DataQuick Information Systems, which compiles data from public records. Frenzied buying has been driven by home hunters' efforts to outrun rising interest rates. "That drives up prices even more,'' observed Christopher Thornberg, a senior economist at the UCLA Anderson Forecast. "It's like a house of cards: As you get more people who leap into the market, it drives up the market based on nothing.''

Housing price volatility is not new to Silicon Valley, which just a few years ago experienced a drop in prices. In November 2000, eight months after the Nasdaq stock bubble burst, the median price in Santa Clara County was $510,000. A slide began the next month, with the median eventually dropping to $435,000 in November 2001, according to DataQuick. Median prices fluctuated again in 2002 and 2003 before a continual climb began in the spring of 2003. DataQuick analyst John Karevoll expects appreciation of valley homes to slow from about 20 percent to the mid-teens this summer. "That's what the real estate market does: It goes up and it goes down,'' he said. "We do not expect prices to go down by much, not unless there is something almost cataclysmic in the economy soon." Ken Rosen, chairman of the Fisher Center for Real Estate at University of California-Berkeley's Haas School of Business, believes something less than an economic disaster could cause big problems for some buyers entering the market. He's concerned that the combination of low interest rates and easy loans has artificially pushed up prices, and lulled consumers into a false belief that home values only go up. That is reflected in the dramatic increase in interest-only loans, which usually become adjustable after five years. Their popularity jumped in California from 1.43 percent of all new mortgage loans in 2001 to more than 47 percent originated last year, according to LoanPerformance, a mortgage data and analytical company. "It's easy to borrow a lot of money, even if you don't have good credit,'' Rosen said. "If we have both a recession and higher interest rates, we could see defaults and delinquencies on mortgages. People don't remember the downturns.''

Cyr, who just moved into his one-bedroom condo, knows the future is unpredictable. "You never know,'' Cyr says. "But if I waited any longer, the prices could go up even more. It's the chance you have to take.''