Good analysis. I'd add that if interest rates go up too much or too quickly then the housing market tanks in a big, big way. People will be angry if/when they wake up one day to discover they're upside down on their mortgages.
You nailed it--the single most scary scenario is a drop in value of housing.
Greenspan pumped up housing "value" by cheapening mortgage money, and since housing is purchased on cash-flow, that simply moved available dollars into asset inflation.
But if it ends.....hooooooboy.
I am still concerned about the bursting of the housing bubble, but it appears to me from my recent observations of consumer prices that the Fed may be going to let inflation handle the underwater loan problem. :-(
I think only ARMs will be affected by the interest rate, the long term rate is actually going down. But, credit card rates will sky rocket.