NEW YORK (MONEY Magazine) - Robert Shiller argues that housing in many cities is undergoing the same irrational exuberance as stocks did in their bubble days. MONEY's Amy Feldman spoke with him in late December about what homeowners and potential buyers can do to keep from getting burned.

Q. So far, home buyers have been right in thinking home prices will keep going up.

A. Part of what drives the bubble is this confidence that the market will always go up. When people hear what a house sold for 30 or 40 years ago, they are astonished. But a lot of that is just inflation, not any increase in real value. It is possible that home prices will sag for a long period of time.

Q. How do today's historically low interest rates play into this?

A. Long-term interest rates have been going down since the 1980s. And mortgage institutions are lowering payments with the expansion of adjustable-rate mortgages and interest-only mortgages, especially in the bubble cities.

Interest rates are a significant factor, but they are not the cause of the bubble. I think they are a potential bubble-burster because as rates start going up, some people will find it intolerable to make their mortgage payments.

And I don't think interest rates have to go any higher to make the bubble burst. The last bubble peaked around 1990, and the Federal Reserve was cutting rates at the time.

Q. So what should we do?

A. Most people want to live in their homes, so they should stay. But people can make decisions to reduce their home-price exposure. One possibility is to not be as ambitious about the size of your house. If you think that you'll move again in five years, then wait to buy your dream house.

Q. What about homeowners who are sitting on big paper profits -- should they cash out?

A. I wouldn't advise someone to sell, because their family situation is probably the dominant consideration. But if someone is at the margin, the question is timing. That's the problem with bubbles: Nobody knows when they will end.

Q. You came up with a pilot insurance program for people in Syracuse to bubbleproof their homes. Did it work?

A. The Syracuse project was a success but on a small scale. Not that many people signed up. We have to come up with a better marketing strategy, and I think we need to get private insurance companies involved. I don't think it will be long until we have hedging vehicles for houses.

Q. What are you doing personally?

A. I bought a summer home on an island in Long Island Sound in 2002. I worry about a bubble in vacation properties. But we wanted to live there in the summer.