Robert J. Schiller, Yale economist extraordinaire and author of Irrational Exuberance, who predicted both the stock market bubble of 2000, and the current housing bubble, holds forth in an interesting article in this past Sunday's The New York Times
How a Bubble Stayed Under the Radar
We have to consider the possibility that perfectly rational people
can get caught up in a bubble
He talks about why even most experts didn't recognize the housing bubble as it was forming, the cascade of information that led people to make the wrong decisions, and how herd behavior helps to explain the housing debacle.
Interestingly, and in conclusion, he states, " it is now possible that a downward cascade will develop — in which rational individuals become excessively pessimistic as they see others bidding down home prices to abnormally low levels"
Flipping back to August 2005, The New York Times did a piece on Mr Schiller back then titled, Be Warned: Mr. Bubble's Worried Again
where Mr. Schiller is described as follows, ' Mr. Shiller is sounding the same warning for real estate that he did for stocks. In speeches, in television and radio interviews and in a second edition of his prophetic 2000 book, "Irrational Exuberance," he is arguing that the housing craze is another bubble destined to end badly, just as every other real-estate boom on record has'.