"Our main conclusion is that the most widely cited evidence
of a bubble is not persuasive because it fails to account for
developments in the housing market over the past decade.
In particular, significant declines in nominal mortgage interest
rates and demographic forces have supported housing
demand, home construction, and home values during this
period. Taking these factors into account, we argue that market
fundamentals are sufficiently strong to explain the recent
path of home prices and support our view that a bubble does
not exist.
As for the likelihood of a severe drop in home prices, our
examination of historical national home prices finds no basis
for concern. Even during periods of recession and high
nominal interest rates, aggregate real home prices declined only
moderately. However, weakening fundamentals could have a
larger impact on areas along the east and west coasts—where
the supply of new housing is believed to be inelastic, home
prices historically have been volatile, and home price
appreciation has been strongest. In the event of such a
weakening, home prices in these areas may fall, as they have in
the past. Nevertheless, these past episodes of home price
declines—although significant regionally—did not have
devastating effects on the national economy."
Here is the complete document. Believe it or not, there are still whack jobs at the Fed who still believe there was no bubble in housing.
http://www.ny.frb.org/research/epr/04v10n3/0412mcca.pdf
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