Let's start by stipulating that my interest in housing bubbles is purely abstract. I'm not rooting for any set of participants or betting on housing going up or down. My approach is to simply look at the dynamics in play and consider what history offers up as potential trajectories. Rick Blaine summed up this perspective in the film Casablanca: "I understand the point of view of the hound, too."

With that said, all bubbles pop, and every bubble is declared "the new normal" that will only continue inflating to new heights just before it pops. Housing only goes up, there's a permanent shortage of housing, and so on.

The bias in reporting bubbles bursting is on the losers, those whose fortunes deflated along with the bubble. But there are also winners when bubbles burst, as what was unaffordable becomes affordable again, and capital that was chasing speculative gains is mangled, and duly chastened, seeks safer returns. Both of these dynamics offer rewards to those who avoided the speculative bubbles.

For context, let's start with the wellspring of the housing bubble, credit. Asset bubbles can arise without credit expanding--the South Seas Bubble, etc.--but in the modern era, gargantuan increases in credit (a.k.a. debt) pump up asset bubbles. Absent a vast expansion of credit, it's hard to inflate a massive speculative bubble.

Here is total credit in the U.S. Even the casual observer will note that the parabolic rise in credit has outstripped the real economy (GDP). As bubbles rise in assets such as stocks, the phantom wealth leaks out of the first bubble and seeks more fertile speculative ground in another asset class, which then bubbles up in a speculative frenzy.