In 2007, we had pheasants living in Detroit, and I saw a fox, or maybe it was a coyote. (The Detroit cops captured a coyote downtown in 2007.)

This year, though, sightings are down 100%. No pheasants, and no foxes or coyotes so far.

I suppose this is a upbeat trend. Downtown Detroit is getting busy enough, compared with last year, that wild, country animals are staying away.

So buyers agreed to mortgages they couldn't afford, lenders lent money that couldn't be paid back, bankers repackaged the bad loans into fancy securities, credit rating agencies gave the securities high ratings, investors gobbled them up, and government looked the other way.

This apportions blame appropriately. But the conclusion is actually the antecedent -- the Federal Reserve did not perform adequate oversight in re the exotic loan products created to open the mortgage market to those buyers least able to afford a mortgage.

In other words, there have always been people unable to afford a mortgage, but they weren't a problem to the housing market as a whole until the rules were changed so as to lend them money.

Shiller believes the federal government should...create a new financial watchdog that would review the quality of financial products in a fashion similar to the Consumer Product Safety Commission. The government should also get involved, he suggests, in regulating the boilerplate language of mortgage contracts, so that consumers don't have to take on faith that all that mumbo jumbo isn't just a scam cooked up by mortgage lenders.

The Fed is already tasked with this, isn't it? At any point, they could have said that high-risk interest only or ARMs wouldn't fly -- they just didn't do it. Any pressure on reform should be directed there.

I agree with Leonard's criticism of Schiller's proposed solution of more derivatives. Home loans worked best when the lender assumed some risk in making the loan, and so worked with prospective borrowers to find a mutually beneficial arrangement. They've always had the option of foreclosure, but most of their money was made on successful loans. Inviting the investor class to partake was the problem in the first place, IMO.

One is price inflation and the other is debt inflation. I know plenty of people who have wisely traded up to huge homes - 7500-10000 sq ft and because of the increase in value of their previous home and the home before that and so on, that they're carrying fairly little debt. That is price inflation. If you can afford it, great. It has the effect though, obviously of driving prices up which causes a larger pool of homeowners who want to buy in to any given market to have to leverage themselves more, in order to do that.

In other words, the problem with a bubble is timing. Once the bubble picks up momentum it's very very very hard for new entrants to jump on and stay ahead of the leverage that's required to buy in.

But what Mr. Leonard is ignoring is the third problem. The one no one talks about - taxes. I bought my house for about 210K in 1996. Its market value is perhaps 280K. But the city believes it to be worth 312K. So I'm paying taxes on a house that's been over assessed by 11-12%. And no city is going to give themselves a pay cut so the taxes are never going to be rebalanced w/o a huge fight. Eventually though if the market takes a big enough drop the cities and counties won't have enough occupied homes to collect revenue from. And the newer homeowners will be paying taxes based on drastically reduced values. Figure on average, mid sized cities in what used to be hot markets will show a 30-50% loss in tax revenue. In most American towns, 55-60% of all property taxes goes to the schools. With a 30-50% cut in revenue, all the soft services like parks and rec, mental and public health will go. Then the schools then the cops and fire.

It will be perfect libertarian social Darwinism in action.

The tax digest issue is a big one here in Atlanta. There's a movement afoot to force an acceleration in new assessments -- on the part of speculators buying distressed properties who don't believe they should pay taxes on pre-foreclosure assessments. It's a hell of a problem -- our system of property tax collection is in no way equipped to handle the unanticipated drop in revenue sure to result.

Here are a couple of salient points not mentioned in the article.

It is an illusion to think that having your home go up in value every year is making you beter off. All the other homes are also going up in value so relatively speaking you are standing still, unless you move from a fast rising market to a slow rising market; or plan to sell your house and live in a tent.

Over the long term it is not possible for house prices to rise faster than the increase in wages or the growth in the economy. If house prices go up faster than wages, the cost of owning a home as a percentage of a person's income will increase until home ownership becomes unaffordable. Historically some adjustment to this relationship has taken place by allowing working wives' income to be part of the morgage/income calculation and increasing the term of the morgage from 20 to now 40 years, all to keep the monthly morgage payment affordable. But it is not possible to have home prices increase at 6% every year when wages go up by 3%.

The US govenment debt has increase dramtically. Credit card debt is increasing at phenominal rates. Home equity loans have resulted in a decrease in the average amount of equity that people have in their home. It is all a low grade Ponzi pyramid that will one day crash.

Robert Shiller has a vested interest in creating more 'rational' debt instruments and future's markets. Which is why he is blind to the Federal Reserve's role, or Wall Street's role. He's part of the game. Good review, Andrew.

That said, I've always found it strange that a house, which was built initially, in materials and labor, for maybe $10,000, with land value of, oh, $5,000, should sell for $250,000.00 years later. And sell over and over and over again, at a higher price each time. Almost the same house each time. The price increases are beyond improvements, improvements being one of the few rational reasons to increase a house's price. My house was built in 1917. Imagine how much the price has risen and how many times it has been sold?

I think we should get rid of the market in housing, and instead understand that living in a house is not a monetary play, or investment. Housing should be a right, but at the same time, it should not be a piggy-bank. Houses should be leased, not owned. The market itself is the real flaw in the real estate bubble.