[jyl]

People are stretching to the limit - zero-down adjustable rate mortgages with payments >60% of take-home income. first and second mortgages (80/10/10s), and so on. Others are speculating - buying homes for quick resale (flipping). Others are taking gains from a first house and putting them into the next house, pyramiding so to speak - this of course requires a steady stream of buyers for the first houses.

Bubbles can go on for long enough that they seem perfectly rational. E.g. the stock market not so long ago.