I've included an extract from a piece by a Yale economics professor, Robert Shiller. He was also the author of Irrational Exuberance which predicted the tanking of the nasdaq I think, about two weeks before it collapsed.
The main point I noted from this was that the housing market has very different dynamics to a stock market, so just because we haven't witnessed a crash stock market style doesn't mean we're out of the woods.
"Housing busts, unlike bear markets on Wall Street, often start almost imperceptibly and unfold slowly. They're difficult to detect in their early phases, in part because accurate price data on comparablehome sales is hard to come by. Sure, you can look at tax records to calculate the prices fetched by two homes, each with four bedrooms and three baths and located in the same town. But determining precisely how their conditions, amenities and neighborhoods stack up isn't easy. ADDING TO THE UNCERTAINTY: Homeowners often live in denial of market realities by listing their properties at unrealistic prices or simply taking their homes off the market to await better times. Shiller worries that the market has become so overheated in many areas of the U.S. that any decline could pick up momentum in two to three years, when the adjustable-rate mortgages that have accounted for nearly half of all home loans in the second half of 2004 will begin to "reprice" at higher interest rates, potentially burying overly optimistic buyers sporting scant equity but hefty debt. Low-to-no-down-payment and interest-only mortgages would only add to the possible mayhem of involuntary sales if home prices were to sag, Shiller adds. In Shiller's view, a real price decline of as much as 50% in U.S. home prices over the next decade isn't beyond the realm of possibility. Such a drop would be less catastrophic than it might seem at first blush. Like any economist, Shiller adjusts annual returns for inflation, which tends to amplify any downturn and mute upturns in nominal home prices.
