(FORTUNE Magazine) – In his 2000 bestseller, Irrational Exuberance, Robert Shiller argued that Americans had become overly obsessed with the stock market. Now the Yale economics professor sees signs of a similar obsession with real estate. FORTUNE's Oliver Ryan talked with him about the bubble question and his novel strategy to create financial hedges for homes.

Are we in a bubble?

In many places we are. At these high levels, what's supporting prices is that people expect them to go higher. That's the essence of a bubble: popular opinion--the general perception that there's very little risk. We surveyed recent homebuyers and found that 28% thought that prices are going to go up 20% a year for the next ten years. At that rate the price of your house would go up sixfold. If you believe that, just put everything you have into real estate. It's not going to happen, incidentally.

What will pop the bubble?

In the past recessions have terminated bubbles; home prices have not fallen without a recession. Right now I don't see a recession on the horizon. But bubbles do have a natural life span.

So what's the life span of this one?

I wish I knew that better. There seem to be signs of a softening, but it's not clear yet because there's a lot of upward momentum in prices. Housing markets don't turn on a dime. Prices might go up substantially for another year or more.

Could the end of the housing boom bring on a recession?

Falling home prices will destroy consumer confidence, and confidence is a powerful driver of the economy. When people see their home values go down, they spend less. That can have repercussions on corporate profits. Companies will have less free cash flow to invest, so they'll tend to put spending plans on hold. They'll lay people off. That's a recession.

Is loss of confidence the only problem?

I might add a slow housing market means less moving. People sitting still will make the economy more sluggish. And home building gets hit--that's one thing that happened in the Great Depression. The construction industry practically stopped.

Then there's also the systemic effect. If there are crashes in home prices, that could bring on problems in the lending industry, and that might be contagious. Remember the S&L crisis? It's not something that's high on my list, but it's possible. And it's what happened in Japan. I hope it won't be as disastrous here--home prices in Tokyo are half of what they were in the late '80s.

What should homeowners do?

It depends on your circumstances. If you're really at the margin, don't let this enthusiasm for the market push you too far into buying. You might consider renting for a while. Then you can move up after the market comes down.

It's too bad you can't buy a put on your home.

Actually, a former student of mine, Allan Weiss, and I have founded a company called Macro Securities Research to make that possible. We're working with the American Stock Exchange to develop securities tied to home prices. We want to do longs and shorts. That way if you're in one of the bubble cities, you could hedge your home investment.