The Housing Bubble
Later editions extend the same framework to the 2000s housing bubble — a second, independently-arrived-at confirmation of the pattern.
The second and third editions of the book, published in 2005 and 2015, extend the exact same analytical framework to the U.S. housing bubble that built through the mid-2000s and collapsed starting in 2007 — a case Shiller was also prominently early in flagging, using the S&P/Case-Shiller home price index (which he co-created) as the housing-market equivalent of the CAPE ratio's stock-market role, showing home prices had detached from historical norms relative to rents and incomes in a pattern structurally similar to the dot-com stock bubble's detachment from earnings.
Shiller identifies the same precipitating-factors-plus-psychology pattern: real structural changes (genuinely easier mortgage credit access, genuine low interest rates) combined with new-era narratives specific to housing ("home prices never fall nationally," a belief that was arguably true in the specific, limited dataset most participants were implicitly using but not true over a longer historical window), feedback loops (rising prices attracting speculative buying and construction, pushing prices higher still), and media amplification — the same mechanisms from earlier chapters, now demonstrated in a completely different asset class and completely different specific narrative, which Shiller treats as strong additional evidence the underlying psychological pattern is general rather than specific to internet stocks.
| Element | Dot-com bubble | Housing bubble |
|---|---|---|
| Valuation gauge | CAPE ratio (stocks) | Case-Shiller index vs. rents/incomes |
| New-era narrative | "The internet changes everything" | "Home prices never fall nationally" |
| Real structural kindling | Genuine internet growth | Genuinely easier mortgage credit, low rates |
| Feedback loop | Rising stock prices attract more buyers | Rising home prices attract speculative buying and overbuilding |
- Later editions apply the same framework to the 2000s housing bubble, using the Case-Shiller index (which Shiller co-created) as the housing equivalent of CAPE.
- The same pattern recurs: real structural kindling, a specific new-era narrative, feedback loops, and media amplification — in a completely different asset class.
- This is treated as strong additional evidence the underlying psychological pattern is general, not specific to internet-stock exuberance.