Is there such a thing as a housing bubble? Nobel laureates say yes...and no.

There has been much talk about the recent "housing bubble" that cost a lot of people - investors included - a lot of money. The recent increase in housing prices has led people to wonder if we are in another "housing bubble", including articles on the BP blog here, here, here, here, and here. But what exactly is a "bubble"? And why were so many people (many of whom make this their job) incapable of predicting this bubble, and the last one, and the one before that? Could it be because there is no such thing as a "bubble"?

See this article on NPR where two of the most recent Nobel Prize winners were asked about their differing views on bubbles. One, Robert Shiller (of Case-Schiller home price index fame) argues that bubbles exist and are predictable (it should be noted that Shiller did in fact predict the most recent housing bubble). The other laureate, Eugene Fama, argues that there is no such thing as a housing bubble, just temporary increases in prices. Because there are no bubbles, Fama argues, no one can predict when the next one will come.

What do you think? Do bubbles exist? If we can't predict them (and it seems we are very bad at doing so), then does it really matter? All we can do is invest conservatively, prepare for a price drop at any time, and make sure that we are calculating our ARV's and returns carefully.