Prices will probably drop some more but personally I don’t expect to ever again see index values around 110. Do you? If we don’t see the massive drop back to “normal” levels then the run up in prices should be described as a shift to a new equilibrium – much as happened during World War II.
Alex Tabarrok at Marginal Revolution uses the oft-quoted Robert Shiller’s chart on home values and concludes that fundamentally there was no housing bubble.
Update: As expected, Paul Krugman has a response.