With prices rising, now is the time to prevent over-investment.

Fannie Mae put an exclamation point on the housing rally with last week's announcement of its largest-ever annual profit. The news comes soon after Fannie's cousin, Freddie Mac, announced its own record high. These results may seem like cause for celebration after years of losses at the two taxpayer-backed mortgage giants. But they also underscore the urgent need for reform to ensure that the next real estate boom doesn't end as badly as the last one.

It's certainly good news that the very long housing recession is finally over, and that prices in most of the country are rising again.

The healthy part of this revival is the normal adjustment of supply and demand after a painful recession. Foreclosures have been slowly working their way through the system, and the long dry spell in building means there are fewer new homes to buy.

But there's a less desirable side to this new boom: It is fueled by the same kind of government super-subsidy for housing that drove the boom and bust a decade ago. Through Fannie, Freddie and the Federal Housing Administration (FHA), the feds now underwrite some 90% of all mortgages.

Meanwhile, the Fed's rock-bottom interest rates and its QE policies are both intended to reflate the housing market. The Fed is buying $40 billion a month in mortgage securities, despite the housing rebound, plus an additional $45 billion in long-term Treasurys to keep mortgage rates low. This makes it cheaper for families to borrow to buy a home. But the Fed's goal is also to keep rates so low that investors will dive back into real estate in a search for yield they can't get from savings accounts or financial investments.

And sure enough, from Georgia to California, investors have been scooping up residential properties, often in foreclosure auctions.

It's true that many of today's investors are planning to be landlords collecting regular rent, not speculators betting on their ability to execute a quick flip. But the hard part is knowing how much an asset-price rally is rooted in genuinely rising prosperity and how much in government policies that can't last. One danger sign now is that prices are rising much faster than the economy, which isn't sustainable over time.

It's also worth keeping in mind that housing is not the secret sauce of economic prosperity. The anemic 0.4% GDP growth in the fourth quarter of 2012 would have been even worse without a 17.6% surge in real residential fixed investment. But even though the government calls it investment in GDP calculations, housing is substantially a form of consumption. A large home (assuming the occupant can afford it) is a manifestation of wealth, not a creator of it.

Every dollar of capital that policy makers drive into housing is a dollar that won't be spent creating the next great innovation in software or medicine or something else. Over the long haul, the economy grows when people invest in things other than housing—specifically in technologies that enhance productivity and allow all of us to achieve higher living standards. Housing does fine when people are employed and wages are rising. In other words, sustainable growth in real-estate values is a symptom of a vibrant economy, not a cause.

In the 2000s, America tried to use a debt-fueled real-estate boom as a substitute for real wealth creation. The Fed's loose money, government endorsement of private credit-ratings agencies and reckless promotion of homeownership created a housing bubble. The bursting of this bubble created a financial crisis. We do not want to repeat the experience.

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