HOUSING PRICES HAVE risen by about 50 percent in the past five years,
and more than 100 percent in some hot markets. Many knowledgeable
observers believe that the United States is in the midst of a speculative
bubble in residential real estate prices that rivals the dot-com bubble of
the 1990s and that will have a similarly unhappy conclusion.
In December 2004 UCLA Anderson Forecast’s Economic Outlook
described the California housing market as a bubble, repeating their warnings
made in previous years. Robert Shiller has issued similar alarms for
several years and, in June 2005, warned that, “The [housing] market is in
the throes of a bubble of unprecedented proportions that probably will end
ugly.”1 Shiller suggests that real housing prices might fall by 50 percent
over the next decade. In August 2005 Paul Krugman argued that there
was definitely a housing bubble on the coasts and that, indeed, the air
had already begun leaking out.