DAVID DRINKWATER: This is a model home that we're offering now. It's on the market for $849,000.
PAUL SOLMAN: David Drinkwater wants to sell me on a house, and on the notion that the nation's housing boom isn't going bust anytime soon.
DAVID DRINKWATER: This door is just freshly painted, so it may be tacky still.
PAUL SOLMAN: The realtor says this new house is typical of those that have sold like hotcakes around Boston for the past decade.
DAVID DRINKWATER: We're in the kitchen, breakfast and great room combination. Natural ash cabinetry is going to be going in with a nice center island eating bar, granite countertops...
PAUL SOLMAN: Custom-made for baby boomers with equity in their first homes who have been trading up.
DAVID DRINKWATER: The houses today are being built bigger than they were built 15 years ago. Economic conditions being what they are, many people today want the bigger and are willing to pay for the bigger houses.
PAUL SOLMAN: You mean economic conditions in general...
DAVID DRINKWATER: In general.
PAUL SOLMAN: ...Not the last year or two.
DAVID DRINKWATER: The affluence that the baby boomer generation has amassed has enabled them to have the bigger and the better.
PAUL SOLMAN: Low mortgage rates, limited land use, a growing population and house-buying boomers have driven up prices so that, in the last seven years alone, the nation's 73 million homes have increased in value by $2.6 trillion. A baby boom boom, you might say.
DAVID DRINKWATER: In the centerpiece of this room here is the Jacuzzi tub underneath the window. And just imagine you're sitting here with the sun setting over here, just outside the window. Come up and have yourself a nice bubble bath, look out the window and enjoy all that nature has to offer.
PAUL SOLMAN: But I can't resist the segue you're giving me here, which is bubble bath, real estate bubble? Any possibility that in fact this is a real estate bubble that is going to burst?
DAVID DRINKWATER: I don't think that a continued growth at these rates can be sustained for the long haul, but that doesn't necessarily translate to that prices are going to drop.
PAUL SOLMAN: Now if you've been a business reporter for 25 years, as I have, you've heard such reassurances before. But I can't help but recall that basic truth: The higher prices climb, the further they are from earth. Oh, how we used to love this image: Japan, 1987.
KENICIHI OHMAE, Economist: Right here where we're standing is the most expensive residential area in Tokyo. A square foot of this property over here-- that is the size a little smaller than the size of my handkerchief-- is $22,000.
PAUL SOLMAN: $22,000 for that much land?
KENICHIC OHMAE: That's it.
PAUL SOLMAN: Who wouldn't be impressed? But 15 years later, that same kerchief's worth of Tokyo is down nearly 60 percent. And look what happened in my own backyard, or at least the backyard of my former producer, Lori Cohen. In 1988 she and her husband bought a home for $250,000 and soon borrowed against it with a home equity loan.
LORI COHEN: We thought the bubble could never burst. We'd paid $250,000 for it, next year it would be worth $300,000, the year after that $350,000. There was only up side, no down side.
PAUL SOLMAN: But you're a producer of economics and business pieces for the MacNeil/Lehrer NewsHour. Didn't it... didn't you remember the things about cycles and all of that?
LORI COHEN: Yes, but, you know, it's like it can't happen to us. You're caught in the speculative bubble and you figure it can never burst, or at least not on you.
PAUL SOLMAN: Of course it did burst. Cohen's house dropped about 20 percent-- $50,000 in value. She didn't sell, but the price drop forced her to cut back her spending. And that's what Dean Baker is expecting again now. He's convinced housing prices are about to crumble, just like stock prices did three years ago.
DEAN BAKER, center for Economic & Policy Research: This was a $10 trillion bubble and people were not paying attention to it. And I see a very similar situation with the housing market today, that you're talking about a bubble-- it's somewhat smaller, it's around $3 trillion-- but in some ways the impact might be worse because housing wealth is more evenly distributed than stock market wealth.
PAUL SOLMAN: Baker means that many who lost money in the market were well-off enough not to cut back their spending, but come a housing crash, lots of homeowners would have to cut back, especially since they've been borrowing against their increased real estate wealth.
DEAN BAKER: People have been borrowing against their homes, supporting consumption, buying new cars, you know, other things that have helped sustain the economy. And that can't go on for very long. People are very heavily indebted. As I say, when the prices turn around, that's going to be devastating to a lot of people.
PAUL SOLMAN: And if enough people stop spending because they no longer have equity to borrow against, it'll be devastating to the economy as a whole, which is arguably part of what happened in Japan. Economist Karl Case doesn't disagree in theory. But, he says, you can't compare the stock bubble to housing.
KARL CASE, Wellesley College: The housing market doesn't bust the way other markets bust. It's not an auction market. People will hold out. There'll be resistance, and if you look at the pattern of housing prices, goes up lot, sticks, goes down a little; goes down a little more, if it's bad, comes back. It doesn't look like the stock market. The stock market, up and down, up and down, up and down, because it's auctions every day.
PAUL SOLMAN: Besides, says Case, for most people, a house isn't just an investment.
KARL CASE: Housing is a consumer durable. They live in it. The biggest part of a yield on a house is that you live in it rent-free.
PAUL SOLMAN: And you get a tax break as well, with a house.
KARL CASE: You get a big tax break with a house.
PAUL SOLMAN: So people don't tend to sell when prices drop. The U.S. housing market hasn't experienced a nationwide drop in price, much less a crash, in the 30 years that records have been kept. And even hot spots like Boston seem to bounce back from the occasional swoons.
KARL CASE: I'm not sitting here arguing that there's not going to be any pain. There's going to be pain and people who have leveraged, who scraped up all their savings and put it into a house and bought at the peak, those people got hurt in Boston in 1990 and '91 very badly. But if they hung on, they did real well in the late '90s. So unless this economy does a Japan, where it goes in the tank for ten years, I'd expect to see things come back eventually, even if we experience a decline in the next couple of years.
PAUL SOLMAN: Lori Cohen didn't panic and sell when the Boston market deflated in the early '90s and her home dropped to $200,000.
PAUL SOLMAN: So what's happened to it since?
LORI COHEN: Since, the market has totally recovered and it's just been going up and up and up and up. And the value of the house is probably about $475,000 now and we bought it at $250,000.
PAUL SOLMAN: Still, burned once, Lori's worried that prices will flame out again, especially in Boston, where they've shot up 159 percent in the past ten years, almost 20 percent this last year alone. And suppose the crash comes just when it's time to pay for son Jeremy's college tuition.
LORI COHEN: My conservative plan was at least, you know, we would have the equity in our house in order to do that. I don't know if we will, you know, given the fact that the market's softening.
PAUL SOLMAN: But the market hasn't softened much.
LORI COHEN: It hasn't softened yet, but remember, I'm counting now. I don't want to use the equity now. I want to use that equity in five years. What happens if the market softens and it takes a long time for it to recover? The equity won't be there.
PAUL SOLMAN: And what happens if it actually turns out to have been a bubble and the bubble bursts?
LORI COHEN: Right. Now, financially we'll be okay but we won't have the equity to pay for college.
PAUL SOLMAN: Literally?
LORI COHEN: Yeah, literally.
WOMAN: When was this built?
WOMAN: It was built about 27 years ago.
PAUL SOLMAN: 55-year-old Dorothy Hite is looking to downsize, to a condo like this one in Brookline, Massachusetts.
WOMAN: Good colors.
WOMAN: Aren't they, though?
PAUL SOLMAN: Hite bought this home in Brookline 22 years ago for $90,000. It's now worth more than $1 million.
DOROTHY HITE: I'm ready to pass the house on. It's a wonderful house. I'm ready to pass on the maintenance to someone else, and it's right down the street from a great grade school. It's time for a family to come in and for me-- tired, old Dorothy-- to downsize.
PAUL SOLMAN: Hite's generation has been benefiting from the run-up in prices at the expense of those born later. Hite herself was a teacher, her late husband a scientist. But young people in those jobs today have more and more trouble affording places like this one. For folks like Hite, however, today's demand for such places is still going to let them retire early.
DOROTHY HITE: For me it's been the best investment and I would not be able to retire if I didn't own this house. This is my nest egg.
PAUL SOLMAN: Is that common? I mean, is that common among your clientele?
CHOBEE HOY: That they've experienced a good appreciation?
PAUL SOLMAN: Well, that they've made money. That they've made their money via real estate.
CHOBEE HOY: Without question.
PAUL SOLMAN: Do you worry that given how fast prices have been rising in this area, do you think it's at least possible that they could experience a fairly precipitous decline?
CHOBEE HOY: I think it's possible and I have seen it happen in the late '80s, early '90s, most recently, probably. But if you're in the marketplace and you're buying a property and you plan to stay there for more than three or four years, then in my experience, historically, you end up okay. If you had to sell in the down period, yes, you absolutely have a problem.
CHOBEE HOY: But you have a little patio space out back that...
PAUL SOLMAN: But in the short run, not many people have to sell their homes, so there may not be much to worry about, unless the down period is a lot longer and deeper than most experts expect. On the other hand, there's always Japan to remind us that the possibility of even the most fantastic downturns are, in this day and age, nothing to sneeze at.