In the aftermath of the global financial crisis and the Great Recession, research has sought to understand the behavior of house prices. Before 2007, countries with the largest increases in household debt relative to income experienced the fastest run-ups in house prices (Glick and Lansing 2010). Within the United States, house prices rose faster in areas where subprime and exotic mortgages were more prevalent (Mian and Sufi 2009, Pavlov and Wachter 2011). In a given area, house price appreciation had a significant positive impact on subsequent loan approval rates (Goetzmann, Peng, and Yen 2012). Many studies have attributed the financial crisis of 2007–09 to a credit-fueled bubble in the housing market. The U.S. Financial Crisis Inquiry Commission (2011) emphasized the effects of a self-reinforcing feedback loop in which an influx of new homebuyers with access to easy mortgage credit helped fuel an excessive run-up in house prices. This, in turn, encouraged lenders to ease credit further on the assumption that house prices would continue to rise.

By contrast, to explain the boom, others have used theories in which house prices were driven mainly by fundamentals, such as low-interest rates, restricted supply, demographics, or decreased perceptions of risk. This Economic Letter compares the U.S. housing market experience with ongoing trends in Norway, examining whether a bubble can be distinguished from a rational response to fundamentals. Survey evidence on people’s expectations about house prices can be useful in diagnosing a bubble.