My own way of thinking places me with the second school of thought. The Bible (thus the gospels) is the written Word of God (this I believe to be true) and the truth revealed in scripture is inerrant, however, the truth revealed goes beyond historical data, rather, it is the ontological truth we find in scripture - a truth not limited to an event in time but a truth that is eternal. It is the truth that exist beyond the phenomenon of an event in human history, it is the metaphysical reality that is revealed to us through the written word - of God acting in and through our human events to bring us salvation. The historical reality of the history of the Bible is Salvation History. The ontological truth is rooted in but transends human history. Didn’t Jesus himself revealed how all of scripture must be understood as something transcending time when on the road the Emmaus He taught his two disciples how all scripture pointed to Him. The events of Israel’s history and all the teachings of the prophets, although important for the people at the time still transcended their time pointing to the Christ event. The event in itself looses meaning without its Christological center of gravity.
I believe, is a major part of the tension between the two school of thought, namely how can we understand the metaphysical reality of the truth revealed in scripture when it is both rooted in yet often times masked by our understanding of what is historical?
We cannot deny the intrinsic communion of history and revelation to do so would be to deny the basis of truth of the principles of our faith; the Incarnation, the public ministry of Jesus, of His Passion and Death and His Resurrection. If these were not actual historical events then all we would be doing is discussing myths and calling it truth and worse we would be basing our catholic faith on a lie making us, as St. Paul wrote, “The most pitible of people”.
So I agree with those who hold that the gospels, and therefore the Nativity Narratives, have their roots in historical events. Jesus was born (atleast that is something I hope we all agree on). Also, today there are scripture scholars, using the historical-critical method and other modern tools of scripture scholarship, who contend that the Nativity Narratives have at their core an oral tradition originating from Palestine (here I have neither the time or inclination to go into this). We know, from both Acts, letters of Paul and the histories of Josephus the Church in Palestine and in particular Jerusalem was under the leadership of actual members of Jesus’ family (James), if this is true then it is not unreasonable to hold that at the core of the Nativity Narratives lies an oral tradition which could be traced to Jesus’ own family members - Our Blessed Mother?
However, if you study the narratives themselves, as historical documents then there are just too many contradictions and inconstancies between the two narritives themselves and no outside sources (i.e. extra-canonical sources such as the writings of Josephus or any Roman historian nor comtemporay Jewish writings predatings the gospels) to give these two narratives either separately or fused together any real credibility as history in our modern sense of history.
Again this raises the question, if they are not myths yet atleast on their outward apparence cannot be considered accurate historical documents then what are these narratives and what truths do they reveal? Again, my answer is these are writings, though rooted in an historical event must be understood first and formost as Divine Revelation of the nature of the Incarnation. Failure to see this, in my opinion, not only obscures the beauty of the stories but the truth revealed through these narratives.
In summary, the Nativity Narritives were never meant to be an explanation of an historical event but the proclamation of the ontological reality (truth) of the Incarnation.