NORTH COUNTY -- The region's swelling inventory of unsold houses, a sharp decrease in home sales and flattening prices all point to a much cooler housing market in the next few years than the red-hot one that prevailed during the first half of this decade, economists and real estate analysts say.

But where the housing market will go from here is anyone's guess, they say.

"It's an irrationally behaving market," said Christopher Thornberg, senior economist for the widely quoted UCLA Anderson Forecast. "It's very difficult to figure out where it is going to go."

Analysts are in wide agreement that the market in San Diego and Riverside counties is caught in a so-called "housing bubble," but they disagree on the implications.

Being in a "housing bubble" essentially means that home prices have ballooned beyond what a region's income levels can sustain in the long run. And that, analysts say, is precisely where Southern California finds itself.

"What you're really asking is, 'What is an asset bubble?' " Thornberg said. "That is when a market price of an asset is completely out of whack with the fundamental value of an asset."

The fundamental value in the case of a home, he said, is how much it can rent for. And all across Southern California, home prices have risen much faster than rents have, he said. As a result, many recent home-buyers are making higher mortgage payments for the type and size of home that others are leasing for much smaller monthly rents.

'Fundamentally unaffordable'

It is inevitable, said Ed Leamer, director of the Anderson Forecast, that the housing market gradually will fall back in line with the rental market, which for the most part has been keeping pace with income growth.

"It can't sit there in a stable, expanded state the way it is now, just because the home prices are fundamentally unaffordable," Leamer said.

According to a report last week by the North San Diego Association of Realtors, prices have risen so high that just 8 percent of San Diego County families in February could afford to buy the median-priced home in North County, which was valued at $635,000.

The median price represents the middle of the price range; half the homes on the market sold for more, and half for less.

Those willing to enter the condo market face marginally better numbers. At $371,700, the median-priced townhome was within reach of 25 percent.

The median price for all homes in North County was $575,000.

Even in traditionally affordable Riverside County, prices have soared out of reach of many families. The median home price in the state's fastest-growing county last month was $410,000, according to a different report by La Jolla-based DataQuick Information Systems.

At the same time, inventories are building up and sales are slowing.

The questions many are asking are: What is going to happen next? Is the bubble going to burst? Is it going to leak out slowly? Or are we in for other surprises?

There are few clear answers, but there are plenty of theories.

Dennis Smith, a Realtor with Taylor Place Real Estate in Carlsbad who closely tracks unsold inventory in San Diego County, suggested that frustrated, would-be home-buyers who have watched as prices have skyrocketed should not sit around waiting for a sudden, substantial drop in prices.

"They've been talking about the bubble bursting for five years now," Smith said, saying that hasn't happened nor is it likely to happen.

Bubble or balloon?

If anything, said Alan Nevin, director of economic research for MarketPointe Realty Advisors in San Diego, the market is about to stabilize at a more sustainable point and set the stage for modest annual appreciation rates of 5 percent or less over the next several years.

"We haven't had a burst. We have barely had a leak in the bubble," Nevin said. "And I think that you'll see come spring, next quarter, that the hole in the bubble is going to be sealed up."

Nevin said that while sales have declined and inventories have risen, there is no reason for existing homeowners to be alarmed that their homes will be worth less a short time from now. He said that is because roughly the same number of people are still shopping for homes. It's just that they are taking longer to select what they want.

"It's taking them (real estate agents) time to make a deal because their clients want to negotiate, whereas last year they weren't negotiating," he said.

Nevin prefers to use the word "balloon" to the term "bubble" to describe the market.

"Bubbles generally are very thin-skinned and pop very quickly, and I'm saying that we are in a balloon that has very thick skin," he said. "Statistically speaking, everything's out of whack, but not practically."

A major correction in the way of a sharp decline in value is just not in the cards, Nevin suggested.

"I wouldn't bet on it," he said. "The (San Francisco) Bay Area's been out of whack for a quarter of a century, and it still keeps growing."

The UCLA economists say that Nevin has a point. But they suggest that real estate analysts who have been waiting for a sharp slip in the market are missing their point about a housing bubble: They never suggested the market would burst.

On the contrary, Thornberg said, the UCLA economists believe that home values will likely flatten out for a long period, as the economy struggles to catch up with the imbalance created by the recent run-up in prices.

"What the price of your house is today is probably what you will be able to sell your house for in 2011," Thornberg said.

Prices slow to react

Leamer said sales probably will decline for an extended period, but prices will not drop because most homeowners just take their houses off the market when values cool -- unless they are in a position where they have to move. Indeed, a precipitous drop in price would require a significant recession and job loss, he said, and that's something he and the other UCLA economists do not foresee for the immediate future.

Even if prices were to decline, that would not happen all at once.

During the recession of the early 1990s, when defense cutbacks hammered the region, sales slowed long before there was any impact on prices, Leamer said.

In Los Angeles, sales volume peaked in November 1988, but home prices did not reach their zenith until June 1991, Leamer said. Then prices began a decline at a rate of about 5 percent a year. It took until December 1996 for median prices to reach their lowest point, which was 27 percent below the 1991 high, he said.

"So, it was really quite a while before the price adjustment began to factor in," he said.

But that period, said Nevin, was such a severe recession that Southern California isn't likely to see anything like it for a long time. He said San Diego County, in particular, was hit by several major tragedies all at once.

For starters, Nevin said, the savings-and-loan crisis stripped thousands of jobs from the region, and General Dynamics' departure took many more. And a national recession was going on at same time. When it was all said and done, San Diego County had lost tens of thousands of jobs.

Economists agree that scenario is not likely to be repeated in the short term.

However, Leamer said they do believe that the economy, both regionally and nationally, is headed for a sluggish period, and that will serve to keep the housing market soft.

"The U.S. economy has had two engines that have pulled the economy at breakneck speed," he said.

The first was the Internet boom of the late 1990s; the second was the housing boom of the last several years.

"Those Clydesdales that were pulling the economy are not with us anymore," Leamer said, and there is nothing coming along to take the housing market's place as a major economic-engine driver.

Contact staff writer Dave Downey at (760) 740-5442 or ddowney@nctimes.com.