While it's likely that the slowdown in the housing sector will have only moderating effects on economic activity and will continue to unfold in an orderly way, I should note that we can't ignore the risk that a more unpleasant scenario might develop. In particular, we have heard a lot in recent years about the possibility that there is a house-price "bubble," implying that prices got out of line with the fundamental value of houses and that the current softening could be just the beginning of a steep fall. While I doubt that we'll see anything like a "popping of the bubble"—in part because I'm not convinced there is a bubble, at least on a national level—it is a risk we have to watch out for.

For example, rents are finally moving up more vigorously after a long period of stagnation. This may reflect, in part, expectations that house-price appreciation will continue to slow, as landlords raise rents to try to maintain the total rate of return on rental properties and as those in the market for housing grow more inclined to rent than to buy.

My own personal view is that there is too much emphasis on housing.  It's also true that there's a very substantial boom taking place that many people don't seem to realize in business structures...  That part of the economy is going gangbusters.  The economy, to me, does not seem to be fragile with that kind of activity.

From Q&A session as reported by Bloomberg News

Therefore, the rapid pace of house price appreciation in recent years likely contributed to the decline in the saving rate.  Similarly, the cooling of the housing market and associated reduction in capital gains on housing will probably provide some upward impetus to the saving rate.  Even so, as I said in my testimony, rising disposable incomes should enable household spending to expand at a moderate pace and provide continued support for the overall economic expansion.

Home prices, which have climbed at double-digit rates in recent years, still appear to be rising for the nation as a whole, though significantly less rapidly than before.

Historically, only around 5 percent of U.S. homes were purchased each year by investors; in 2005, it appears that figure was considerably higher. In many cases, investors purchased homes because they believed prices were going to rise further, not necessarily because they wanted to retain the property over time for rental income. As prices level off or even decline, it will be important to see whether this investor activity subsides significantly, and if so, the impact on mortgage markets more broadly.

Leading indicators of commercial construction spending, such as billings by architectural firms for design work, point to further increases in activity in coming months. An upturn in commercial construction could offset part of what is anticipated to be a waning contribution to GDP growth from the housing sector.

The sectors of the economy that will support our economic growth this year are expected to be somewhat different from those that prevailed in the past few years. The housing market, after several years of strong expansion, is already showing signs of cooling off this year. Consumer sentiment has been deteriorating, according to the latest survey responses, and recent data show signs that consumer spending is softening from its strong first-quarter performance.

Consumers have sustained their spending during the past several years, in part, by cashing out some of their home-equity dollars. This extra source of financing is likely to slow down in a softening housing market. Fortunately, though, I expect to see enough employment and income growth coming out of the labor market to keep consumer spending advancing at a moderate rate.

Part of this moderation in growth is coming from some easing in the extraordinary pace of home construction, sales, and price appreciation—a development we’ve been expecting for some time. Don’t get me wrong. I do not expect a sharp residential real estate correction, but I believe we should recognize that a slowdown in housing activity is very likely—and may have begun already.

Many jobs depend on home-related construction and mortgage businesses, and important industries in our regional economy such as durable goods and carpet production also rely on housing construction. But even if there were no growth in housing construction, the level is high enough now to support strong ongoing demand for home products and related goods. Furthermore, consumers will continue to remodel existing homes and replace worn-out appliances and furniture. Looking at the broader context of our diverse and dynamic economy, direct residential investment is only about 6 percent of GDP.

As had been expected, recent readings also indicate that the housing market is cooling, partly in response to increases in mortgage rates...A slowing real estate market will likely have the effect of restraining other forms of household spending as well, as homeowners no longer experience increases in the equity value of their homes at the rapid pace seen in recent years.

The process of adjustment that appears to be underway in the U.S. housing market, occurring as it is after a sustained and very substantial decline in the household savings rate, provides more than the usual challenge in predicting the future strength of consumer spending.

To be sure, most forecasters are expecting the overall pace of economic activity to moderate to a more sustainable pace in coming quarters as housing markets gradually cool and the delayed effects of higher interest rates and energy prices temper domestic demand. However, with economic activity abroad expanding at a solid pace, export sales should provide some support for domestic production.

Looking ahead, continued job growth and underlying demographics suggest the underpinning for housing over the longer term is solid. But the market is changing, and the impact of the housing adjustment on overall economic activity is not yet fully evident. Some slowdown in housing is built into almost everyone’s forecast. But housing could turn out—once again—to be more resilient than expected, or the adjustment could turn out to be more extensive than anticipated.