Living in Naples, which is widely regarded as the most over-priced real estate in the nation, gives me a clear view of the housing market. And what I see is encouraging.

Currently in Naples there are slightly more than 8,000 homes and condominiums for sale. To put that number in perspective, you need to know that 8,900 homes and condominiums changed hands in all of 2005. So we have almost a year’s worth of sales on the market now.

Pessimists look at these numbers and argue that " Naples is in trouble," because there is a huge inventory of unsold homes here. However, that gloomy assessment falls far short of reality. Naples is booming, tourism is booming and business is booming.

A year ago, realtors in Naples were very concerned about the LACK of inventory. There were too few listings. Owners weren’t ready to sell. Buyers had a hard time finding homes last year. There were multiple bidders for every house or condominium that came on the market. Obviously you can’t sell what you don’t have in stock. Having enough inventory is always an issue in any market. Since sellers were so reluctant in 2005, you can argue that more homes and condos could have been sold in 2005.

Now, things have changed. The constant barrage about a housing bubble has brought out the sellers. Now we have the inventory. The question is: Do we still have strong-enough demand or have all the buyers been scared away by the "housing bubble" talk?

The Fear of the Bubble Prevents the Bubble

I have long said, “That which we most fear is least likely to occur.” Fear is its own leveler. In 1999, we feared Y2K—which didn’t happen—but we showed no fear as stocks soared and earnings stalled. Billions were spent making sure Y2K did not destroy the world’s financial markets.

Fear is a wonderful cure for many perceived financial ills. This applies to the housing bubble myth, too. For years, we have been bombarded with warnings about house prices being a bubble. Newspapers, TV and the Internet have constantly warned us about a potential disaster when the housing bubble bursts.

If there ever were a case where people have been brainwashed on a “sky is falling” issue, this is it. Everyone buying a home today is deeply worried about paying too much, or seeing variable rate mortgage costs rising. Because of this fear (and higher prices), we have seen a slowing in the housing market.

Fear is changing our behavior.

The days when a “for sale” sign triggered a bidding war are over. The number of homes listed for sale is rising back to normal levels, but buyers are cautious. Sellers are posting more reasonable asking prices. I agree with the OECD study that showed U.S. housing being fairly valued. But in any case, the endless warnings of a housing bubble will prevent any such bubble from developing.

That’s why I think certain housing stocks are still good investments. Let’s take a look at two of my favorites and how this perceived bubble affects them:

Countrywide Financial (CFC) is under pressure because of Wall Street’s anxiety over housing. In Countrywide’s case, the level of mortgage volumes is more important than rising or falling house prices. The Mortgage Bankers Association expects mortgage volumes to fall 15% to 20% this year, but past forecasts have been way too pessimistic. Now, with 30-year home mortgage rates falling back toward 6%, mortgage volumes are likely to do better than that.

There is another part of Countrywide’s business that will shine this year. Countrywide’s mortgage servicing portfolio is over $1 trillion, up more than 30% over a year ago. With rates stabilizing and the yield curve under pressure, turnover in the servicing portfolio will be far less than in the past.

Mortgage servicing will deliver excellent profits this year and next. Countrywide is also a takeover target. I don’t know abut any proposals. I am just using common sense. There are large numbers of mergers and acquisitions taking place. With bank interest rate spreads under pressure and likely to stay that way, reliable profits from mortgage servicing look even more attractive. I won’t be surprised if Countrywide comes into play in 2006.

Wall Street’s 12-month price target is $40. Mine is significantly higher. Countrywide also pays a dividend of $0.16 per quarter, for a 1.9% yield. I expect the dividend will be raised again this year. Over the past five years, earnings have grown from less than $1 a share to more than $4 a share. In the process, we saw an historic fall in interest rates that fueled a mortgage refinancing boom. That won’t be repeated anytime soon. But suppose earnings double in the next five years. That would mean an $80 stock, more than a double.

My second favorite housing stock reported a great fourth quarter and great 2005, but the stock came down. Some sellers must have seen the early numbers below Wall Street estimates. After the details came out, the stock headed higher. And well it should! Mortgage volumes were flat and the yield curve flattened in 2005, putting pressure on banks. Competitors’ profit margins fell 25% to 50%, but still this stock delivered a 34% increase in earnings.

Management raised the dividend 22% over 2005. For 2006, the stock is factoring in a 20% drop in mortgage volumes and a flatter yield curve, a combination of factors that seems dismal. But management says earnings will likely be up 10% over 2005.

As housing bubble fears prove to be exaggerated, I see this stock rising considerably. With a 4.4% yield and market-beating gains, this stock is a definite buy.