2004, “Is There a Bubble

in the Housing Market? The popular press is full of speculation that the United States, as well as other countries, is in a “housing bubble ” that is about to burst. Barrons, Money magazine, and The Economist have all run recent feature stories about the irrational run-up in home prices and the potential for a crash. The Economist has published a series of articles with titles like “Castles in Hot Air, ” “House of Cards, ” “Bubble Trouble, ” and “Betting the House.” These accounts have necessarily raised concerns among the general pub-lic. But how do we know if the housing market is in a bubble? The term “bubble ” is widely used but rarely clearly defined. We believe that in its widespread use the term refers to a situation in which excessive public expectations of future price increases cause prices to be temporarily elevated. During a housing price bubble, homebuyers think that a home that they would normally consider too expensive for them is now an acceptable purchase because they will be compensated by signifi