Deep breath. OK, here goes: For the first time in a very long time U.S. housing might actually be a reasonable buy on a five-year view.

As a long-time housing bear and someone who believes there is still considerable pain to come in the U.S. economy and banking system, that is quite a hard thing to say.

However, historically cheap long-term fixed-rate financing (less than 5 percent on a 30-year mortgage) and the prospect of some nasty inflation a year or two out, both courtesy of current Federal Reserve and government policies, make owning a real asset that is debt-financed a lot more attractive than would have been the case just three or six months ago.

What I am not doing is calling the bottom of the housing market; there are still reasonable falls to come on top of the 20 percent or so declines we have already seen nationally.

Futures show an expected decline of about 4 percent on the Case-Shiller 20 City national index between May of this year and May 2010, and a recovery to current levels only in 2012. I actually think it might get a good bit worse than that; there are still substantial repossessions that need to filter through, unemployment will surely rise from here and an economic recovery, when it comes, will likely be pretty weak. This is not an argument about the housing cycle turning and leading us, as it has so many times before, out of recession.

Having said that, one very important thing seems clear: the Federal Reserve will do what it takes, and very possibly a good deal too much, to stop deflation.

Indeed, there is a reasonably high risk that inflation will get away from the Fed or that buyers of Treasuries take a pass. This inflation will be very handy for those who’ve leveraged up to buy housing.

Economist Tim Lee of Greenwich, Conn.-based pi Economics, a long time “deflationista,” now thinks that while deflation may still have the upper hand, current policies will inevitably be inflationary.

“The amount the Fed is doing will be enough to cause inflation, and I think that’s even if economic growth is fairly poor,” Lee said in an interview last week.

Broad money supply is rising at a more than 14 percent annual clip, the fiscal deficit will be about 13 percent of GDP this year and the Fed’s balance sheet has ballooned.

A Reasonable Alternative

And while housing won’t exactly thrive in a period of high inflation and low growth, it may perform reasonably well compared to the alternatives. Government bonds will get whacked by inflation and stocks may do a bit better than bonds over the medium term, though they will suffer as the quality of earnings declines.

Stock market investors now are conflating the end of the very steep declines in the economy with a return to productive investment and a sustained rebound that will drive profits. That might be an optimistic reading. Stocks do offer some protection against inflation but they are far from a perfect hedge.

It is also heartening that investors are returning to many of the hardest-hit real estate markets in the nation, such as Florida. These are people who do not rely on a lot of leverage and are happy to take the very positive cash flow from rents.

Mortgage rates are at an all-time low despite the absolutely terrible performance of recent vintage mortgages. This partly reflects the very low interest rate environment, but also is a function of the Fed intervening directly into credit markets in order to drive down rates to below where they very likely would be if investors demanded the kind of premium you would expect given recent experience. It also remains true that if things become really terrible, you can always walk away from a loan in the U.S., though it is pretty unlikely that this comes into play for a borrower who puts 20 percent down now.

Remember too that stabilization in the housing market is an absolute precondition for a recovery in banking and the economy generally, and it is clear from the steps the Fed and government have taken, in driving rates down and keeping the taps of government-insured loans flowing, that they understand this and will act on it.

They will likely not be successful enough to save some of our largest banks, and all too successful from the standpoint of staving off deflation, and for someone borrowing at 5 percent interest for 30 years to buy a house in a part of the country which is not dependent on financial services, they may be very successful indeed.

It almost certainly won’t look that way in a year, but could well in five or seven.