I think we had a moral panic about mortgages a decade ago and we imposed a recession on ourselves as a result. This creates a sort of positive feedback loop, similar to, say forming an opinion about a mistreated ethnic group because they frequently lash out against their mistreatment - "See. They are a bunch of animals. That's why you can't treat them any better." We closed down the mortgage market, imposing desperation on low priced housing market, and now we say, "See. We were right. This is why you can't let people have mortgages. Too dangerous."
There are so many facts that appear to support the bubble story, which viewed more carefully, really don't.
Here is a recent post at calculatedrisk remembering the rise of housing inventory in 2005 that caused him to begin to call the end of the housing boom: Bill McBride, understandably, sees this as a vindication of his predictions about unsustainable housing markets at the time. I don't blame him. How could he come to any other conclusion?
The links in the post refer to rising inventory, and it looks like the examples are from Orange County, CA. That is interesting. We are supposed to believe that an expansion of mortgage credit to marginal homebuyers eventually ran out of steam, where the last suckers in the Ponzi scheme that was pushing home prices up finally were so incapable of paying their mortgages that defaults started piling up, leading to falling demand and falling prices where homes had been overbuilt.
Yet, Orange County is hardly the first place that would come to mind if we think of (1) a surplus of homes or (2) credit constrained households. The reason Orange County was an early source of excess inventory is because the Fed was sucking cash out of the economy to counteract the housing boom, and since the boom was based on fundamental supply issues, that attempt at a solution was perverse. So, while housing markets in low income parts of L.A. were still quite strong, and while low income households were still streaming out of L.A. to places like Phoenix for lack of housing in those neighborhoods, places like Orange County were starting to feel the pinch of a liquidity constrained economy.
Here is a graph of the change in housing turnover in LA. In 2005 and 2006, turnover was falling in the high priced zip codes. The slowdown started at the top. There is a similar pattern in prices.
In 2005, when inventory started to build, and even in 2006, there was a significant amount of out-migration from the zip codes with lower incomes because of a lack of housing. Eventually, the liquidity crisis hit the mortgage markets that were facilitating that migration, and those neighborhoods succumbed, too. So, missing this subtle aspect of the period - that the problems started at the top - leads to a sense of support for a story that may be mostly backwards.
I don't have detailed enough data on housing inventory to confirm the turnover and price data with inventory data, but the Census Bureau has some inventory data, broken down by region. They have a measure of the median asking price of vacant homes. In the next graph, I have plotted the ratio of the median price of vacant homes to the median price of new homes sold. While this isn't nearly as geographically detailed as the Zillow data above, it does tell the same story. As the boom aged and became a bust, the inventory of vacant homes appears to have been weighted toward higher priced homes, even into 2008. This was not the case in the Midwest. It was mainly in the West, the Northeast, and in the South.