The nation’s housing sector is supposedly crashing, bringing the rest of the economy to its knees. Today’s GDP figures are lower due to housing, but reports of the sector’s demise — and its effects on the total economy — are exaggerated. New findings on financial deregulation in mortgage markets show that New Yorkers will continue to benefit from investments in housing.

Over the past quarter century, New York has been the top state in the country in house price appreciation. Over the past five years, it has been in the top 10, with appreciation of 73%. New York median house prices rose 11% between 2004 and 2005, and this year they already have increased by 2.4%. Over the past generation, New York homeowners have accumulated wealth more rapidly than other Americans simply by owning a home.

But housing is naturally slowing from its rate of the past two years. Its rapid growth could not continue. Even though last month’s national housing starts, a measure of new houses under construction, surprised analysts by rising 5.9%, for the year as a whole, starts are down 9% from 2005. If this year’s trends continue, it would result in a level of 1.85 million housing starts in 2006.

John Weicher, my colleague at Hudson and formerly assistant secretary and federal housing commissioner at the U.S. Department of Housing and Urban Development, says that this level of housing starts “is lower than the past three years but better than any previous year back to 1978.”

Similarly, yesterday it was announced that sales of new single-family homes actually rose by 5.3% in September. Existing home sales fell 2% in September to an annualized level of 6.18 million units. It’s likely that 2006 sales for both will end up below 2004 and 2005, but in line with 2003 figures.

The boom years of 2004-2005 provide an unrealistic perspective when we look at housing starts and sales. Because these years were off the charts, 2006 looks poor in comparison. But 2006 levels are in line with 2003 patterns. What we are seeing is a return to a more sustainable growth path.

One reason for this sustainable growth path can be found in new research by a professor at Princeton, Harvey Rosen, along with economists Kristopher Gerardi and Peter Willen of the Federal Reserve Bank of Boston.

Mr. Rosen finds the financial deregulation that took place in the 1980s has enabled households to borrow based on their long-term rather than their current incomes. Milton Friedman won a Nobel Prize for the now-common idea that people spend based on expectations of lifetime, rather than current, income. But the impediment to spending in accordance with future income is the ability to borrow. Being able to borrow based on lifetime income makes the demand for housing stronger.

Using information on earnings and spending for the period 1969 to 1999, Mr. Rosen finds that up to the mid-1980s the size of mortgages was closely related to current income. After 1985, the market for housing finance improved, and Americans were more likely to be able to obtain mortgages that were in line with their long-term income prospects.

The mortgage products available to Americans have expanded dramatically over time. In the 1970s homeowners could get any mortgage they wanted — as long as it was a 30-year fixed term. By the end of the 1980s they could get adjustable rate mortgages, 20-year mortgages, and even interest-only mortgages, many developed by New York financial institutions. Another change was that portfolios of mortgages began to be converted to securities and traded among New York investors.

According to Mr. Rosen, the “combination of innovative mortgage products, deregulation, and the development of a secondary market in mortgages” has substantially enhanced the ability of Americans to buy homes that make sense for them given their expected future incomes.

The ease of obtaining a mortgage is especially important to first-time homebuyers, whose major constraint is the down payment. It is also more important to lower-income homebuyers with future potential for income growth, who found their ability to borrow limited under prior regulations.

For residents of New York, where prices are above the national average, financial flexibility and increased ability to borrow are vital. At 56%, New York State has the lowest home ownership rate of any state, and so many potential new homeowners stand to benefit.

Large homes appreciate more than small ones, and the ability to buy a bigger home in line with future income leads to a greater build-up of home equity. Further, the increased ability to borrow reduces the large transaction costs associated with multiple home purchases, as well as the stress of moving.

Mr. Rosen, using econometric tests, could not find any effect of Fannie Mae and Freddie Mac on households’ borrowing ability. This though the justification for their existence has always been that they help lower earners. It appears that, despite their rhetoric, Fannie and Freddie are not helping those segments of the population who have the hardest time buying a home, i.e., those who are young, poor, or buying a home for the first time.

Rising incomes and an expanding population will keep the demand for housing high, and households’ access to liquidity will ensure that the demand can be satisfied. The recent slowdown in the industry, both in New York and around the country, has taken many measures of activity back to 2003. This is a cyclical downturn, not a crash. The New York housing market will, as it has in all other cycles, rise again.

Ms. Furchtgott-Roth is a senior fellow at the Hudson Institute and director of Hudson’s Center for Employment Policy. From 2003 to 2005 she was chief economist at the U.S. Department of Labor.