Contrary to the “bubble theory,” actual housing prices have risen slightly over the last four quarters, so far remaining well above what they were before the housing boom. Although real housing prices are sharply off their highs, today they appear high by historical standards.
Bubble theorists might say that some unfounded optimism lingers in the market place, and that Professor Shiller was just a little early in predicting that real housing prices would soon be significantly below what they are now.
But another interpretation is that a large fraction of the housing price boom was justified by fundamentals. If so, we are probably asking too much of the Federal Reserve and other regulators to accurately disentangle bubbles from fundamentals the next time that asset prices rise.
– University of Chicago economics professor Casey B. Mulligan, suggesting on the New York Times’ Economix blog that “there was a good, rational reason for housing prices to increase over the last decade,” and that “at least part of the housing boom was an efficient response to market fundamentals.”