Irrational Exurberance?

So how long can California’s housing prices continue to climb? So far it seems that price spikes have been endless, nudging countless thousands out of the market for a first home, while making for huge profits for those who already own. But the man who warned Fed Chairman Alan Greenspan about the impending late 1990s bubble is again speaking out. And this time it is about the housing market. The New York Timeshas the story of how Yale economist Robert Shiller first told Greenspan about the dot-com bubble. “As they ate lunch in a stately dining room at the Federal Reserve that day in December 1996, Mr. Shiller argued that the stock market had risen to irrational levels. In a soft, Midwestern-tinged voice, he asked Mr. Greenspan, the Fed chairman, when the last time was that somebody in his job had warned the public that the stock market had become a bubble. Mr. Greenspan listened without giving his opinion, and Mr. Shiller went home assuming that he had been farther away from Mr. Greenspan than Ms. Cohen in more ways than one. Three days later, however, driving his son to school in the family Volvo, Mr. Shiller heard on the radio that stocks were plunging because Mr. Greenspan had asked in a speech whether "irrational exuberance" was infecting the markets.” Quite a story. More worrisome, thought, is what Shiller says about the future. "This is the biggest boom we've ever had," said Mr. Shiller, who bought into the boom himself in 2002, with a vacation home near one of Connecticut's Thimble Islands. "So a very plausible scenario is that home-price increases continue for a couple more years, and then we might have a recession and they continue down into negative territory and languish for a decade." There is definitely something to what Shiller is saying. Prices—of anything—can’t endlessly rise without enduring any type of “market correction” (i.e. a price drop). The real question is why it takes an economist who made a similar prediction about stocks nearly a decade ago to bring validity to that economic truth to the housing market. Why is it that people turn blinders on as the housing market booms—taking out interest-only loans for 5 years—which will only drive the market into an ever deeper spiral of recession (or depression) when the bubble does burst?