Rosewater

... Other economists think the discrepancy between falling rents and rising house prices can be explained. Expensive house prices boosted demand for rentals among new arrivals during the Bay Area's late-1990s economic boom, said Steve Cochrane, an analyst for Economy.com, a West Chester, Pa., firm. When the economy tanked, tenants moved out and homeowners hung on, so the rental market took the brunt of the slowdown, he said. And cheap loans tilted the playing field further toward home purchases, said Christopher Cagan, an analyst for First American Real Estate, a title insurance firm: "Low interest rates have made a lot of renters into buyers." Michael Sklarz, an analyst for Fidelity National Information Systems, another title insurance firm, dismissed Baker's bubble argument as "naive" and saw limited risks to homeowners. "You'd have to see substantially higher (mortgage interest) rates for the so-called bubble" to deflate, he said. But Cagan saw another danger: home buyers relying on adjustable rate loans or introductory rates to leverage their buying power could be vulnerable to a downturn. A bubble, he said, is "a market driven by psychology" rather than economic fundamentals. Gimmicky lending has some worrisome similarities to a bubble psychology, he said.