01:00 AM EDT on Monday, June 26, 2006

Emotions on the housing bubble have never run so high. With so much at stake, there has to be a silver lining on the horizon.

At this point, the data on rising inventories and stagnating prices speak for themselves. And yet, the denial factor has never been so stubbornly embedded in some homeowners' and homebuilders' psyches.

The pundits keep confusing the matter, insisting on the prospect of a soft landing. This alone could be causing sellers undue harm, as they hold out for a better price when they should salvage their credit standing instead.

But any man or woman on the street should be able to see through the blather.

Any lingering doubts were dashed with last week's news: Some $1.3 trillion in adjustable-rate mortgages will reset within the next 18 months; building starts popped, sealing sellers' fate; and try battling with 4 million other sellers to attract buyers' attention.

Goldman Sachs recently noted that the rate at which supply is growing indicates the inventory-to-sales ratio will rise "to levels that have historically been followed by real home-price declines."

And yet the merry-go-round keeps turning, because money is still cheap enough to get business done.

In some holdout and late-blooming pockets of the country, developers are still breaking ground on condo developments and subdivisions, and speculators continue to arrive to soak up the supply. A recent study showed a stunning 39 percent of the country's single-family houses as being overvalued.

Another way to look at how brisk activity remains is through the prism of mortgage equity withdrawal, or MEW, which captures proceeds from cash-out refinancing activity, home equity borrowing and proceeds resulting from sales. After peaking above a $1-trillion annualized rate in the second and third quarters of last year, it dropped back to a $903-billion rate in the fourth quarter.

But then MEW made an unexpected turn, picking back up to $930 billion. One important detail is that all of the increase fell under the category of turnover or, as Goldman Sachs calls it, "inactive MEW." Refinancing and home equity borrowing, or "active MEW," declined as opportunities dried up and house price gains slowed.

Goldman predicts active MEW will plummet over the next two years, as house-price inflation slows sharply. This will result in a negative multiplier effect on price gains going forward -- a vicious payback for refinancing activity goosing prices in recent years.

Still, the overall rise in first-quarter MEW is indicative of the speculative fervor that has characterized this real-estate cycle as no other. It's no wonder the Federal Reserve is adamant about not pulling back yet on its interest rate hikes.

Today and tomorrow will bring fresh data on new and existing house sales for May. No matter how bad the inventory numbers are, Fed officials will emerge from behind closed doors Thursday afternoon with a 17th consecutive rate hike in hand.

In short, the end result of the bursting of the housing bubble hasn't even arrived, and we're one year past the peak.

But I have begun to see a light at the end of the tunnel, as in the aforementioned silver lining.

No matter how bad things get in the aftermath of the housing-induced slowdown to come, certain industries will flourish.

A recent discussion with Paul Halpern, a partner at Philadelphia-based Chrysalis Capital Partners, shed light on the opportunity side of the slowdown in housing. He has a particularly good vantage point, as Chrysalis is a private equity firm that invests in troubled companies. In other words, he's on the frontline of the fallout.

On the goods side, the opportunities will emerge from the industries that get hit the hardest.

Northern Trust Co.'s Paul Kasriel recently mined May industrial production for candidates. The production of appliances, furniture and carpeting was down 1 percent, its second monthly decline. And the production of construction supplies was off 0.6 percent after a weak April.

A bit further out on the spectrum, auto production was down 1 percent, its sixth decline in eight months. And production of computers, video and audio equipment fell 1.3 percent, its fourth decline in five months.

In all, housing and consumer spending now contribute a record 76 percent to gross domestic product. And households devote a record 55 percent of their income essentials, defined by The Bank Credit Analyst as housing, consumer debt service payments, energy, auto leases, medical care and food.

As housing slows further, something clearly will have to give.

On the lending side of the economy, a full-blown meltdown in the household sector will be avoided by virtue of lenders working things through with many of their clients.

Some of the direct beneficiaries of this process will be companies that service mortgages, as opposed to the companies that own them. These servicers' business increases as late payments rise.

"These companies that collect fees and revenues from problem loans will do great," Halpern said. "They're not responsible for the performance of the loans, but they are responsible for the servicing of them."

And cottage industries all over the country will benefit from the inevitable rise in foreclosures. Attorneys, real estate agents, property managers and appraisers who specialize in this area will regain their footing after years of slowing business.

As for investors, the rise of distressed debt funds ensures there will be a way to invest in companies that lose more than their fair share of valuation. Any veteran of the distressed world knows now that many subprime lenders will emerge from the storm battered but with steady, established franchises.

"There are banks that are overexposed to adjustable-rate mortgage risk," Halpern offered as one example. "But it's the shareholders, not the depositors, who will have the problem. That creates a silver lining for those who invest in distressed debt."

And that's just the lending industry. Distressed debt funds will also uncover gems with inordinate exposure to the consumer sector.

If you think these investments sound too esoteric now, wait a bit. The availability is sure to present itself soon enough.

Danielle DiMartino is a financial columnist for The Dallas Morning News and may be e-mailed at ddimartino@dallasnews.com