Blame for the financial crisis falls at the feet of many. The Fed kept interest rates too low for too long. The likes of Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), and Merrill Lynch (now owned by Bank of America (NYSE:BAC), which itself owns some blame) were leveraged to the hilt, and they cheerfully sliced and diced mortgages into risky mortgage-backed securities.

Then there were the credit rating agencies. Moody's (NYSE:MCO) et al. tacked misleading ratings onto the securities, providing a totally false sense that they were safe. To top it all off, AIG (NYSE:AIG) "insured" the risky securities with credit default swaps … which turned out to be toxic.

But at the core of the crisis is the housing market. And while that market has shown some signs of recovery recently, the sustainability of that recovery remains in question. Lately, shares of homebuilders like Pulte Homes (NYSE:PHM) and Toll Brothers (NYSE:TOL) mirror that uncertainty.

To gain some insight into the state of the housing market, I spoke with the man who had the foresight to call the housing bust: Robert Shiller. Shiller is a Yale finance and economics professor, the co-creator of the S&P/Case Shiller Home Price Index, and author of numerous books, the most recent being Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.

Shiller is not certain the housing market has bottomed, and says he thinks home prices could fall back. He predicts that housing prices will be much more volatile going forward, and that five years from now, home prices will probably be at about the same level they are today. What follows is an edited transcript of our conversation.

Jennifer Schonberger: What is your take on the state of the housing market now? Are you worried?

Robert Shiller: With the housing market, it's really hard to tell because we've had a huge recovery in the housing market. Prices are going up rapidly now. … It's going up so solidly at the moment. But on the other hand it all looks risky, too. So I think we could see new lows in home prices.

Schonberger: So, then, you think there could be a “double dip” in housing prices?

Shiller: Probably nothing dramatic. The most likely scenario is that we might lose some ground in the housing market, but not a whole lot. Housing prices haven't shown that much business cycle correlation. Housing prices in real terms didn't do a lot in the Great Depression, and they were actually rising in the later Depression.

So I just don't see any clear path for housing prices. My best guess is that they might stay around where they've been in the last few months. They might go up for a while, then come down and stay level.

Schonberger: Then the housing market has not bottomed?

Shiller: No. There's a substantial chance it bottomed, but it's really still uncertain.

Schonberger: Where do you see home prices five years from now?

Shiller: We have a market for home prices that we've launched on the NYSE in June. It's market UMM and DMM. We have a website, Macromarkets, that translates the price in that market to a forecast for home prices in five years. It's been predicting modest increases -- basically no change in five years.

Schonberger: So you're expecting prices to stay stagnant for the next five years?

Shiller: Well, our UMM market tells us the point in five years. It doesn't tell us what will happen on the way. Right now, home prices are rising pretty fast. So, taking that fact into account, a plausible scenario would be that prices rise for some more months and then drop back, but not a huge drop back, so that they end up about where they are [now] in five years.

That seems plausible to me, given historical experience that we went through the biggest bubble in home-price history. Historically, home prices have not shown so much volatility and have not shown such a correlation with the business cycle. So, looking at that, I suspect home prices just won't do a lot over the next five years.

On the other hand, if you look at the housing market, the fact that we went through this enormous bubble suggests that people have gotten more speculative about housing. It didn't used to be considered a speculative market. It was home. It used to be widely believed that home prices were widely driven by construction costs, and those have been stable through time.

We've gotten to think of them as speculative, and that means we may make them behave speculatively. So I think that volatility of home prices may be higher than [it was] in the past. That's why I think it's still worrisome that home prices could fall and set new lows. That is not my preferred scenario, but I could certainly see that happening.

Schonberger: What are one or two economic indicators that you look at to gauge the health of the economy?

Shiller: First, I look at confidence indexes: the Conference Board and the Michigan indices. Those are very important because they're basic indicators of animal spirits. I also have my own investor confidence index through Yale. It's called crash confidence, which is confidence there won't be a stock market crash. That has fallen quite a bit recently. So there was less confidence in the market.

I also look at data on homebuyers' attitudes that I collect with my co-author, Karl Case. We have been looking at our own data on homebuyers' expectations, and we have found that expectations have come down since the peak in the housing market.

We've found expectations for future home price growth for one year have changed dramatically. Last year, they were expecting price declines, now they're expecting modest price increases over the next year. Expectations for prices in 10 years are fairly stable.

The 10-year expectations have me thinking that there could be a good period of rising home prices. I just don't think it will be boom years. Even though it looks like the beginning of a boom, I don't believe it. It might be a period of modest growth. I don't see the kind of enthusiasm [that's needed for a boom].

Schonberger: You mentioned that you think that speculation is going to become ingrained in the housing market going forward, maybe for the next five years or so. What lessons should we have taken from the housing-market bust? And have we learned our lesson, given that you think that speculation is going to be inherent going forward?

Shiller: Well, I thought the lesson that we should have taken was that housing was a risky investment and that we should be wary of putting all of our savings into a leveraged investment like that. We should have learned that there are over 15 million households underwater, with mortgages higher than the value of the home.

What I would like to see happen is some change in our institutions that helps protect people against this kind of mistake in the future. I have a proposal in my book, Subprime Solutions, in which I propose a different kind of mortgage called a continuous workout mortgage.

This is a mortgage that has a preplanned workout built into the initial mortgage. This is analogous to the "wind-down plans," or corporate living wills, for corporations. Corporations should have a plan for what happens if they go bankrupt. Similarly, I think there should be a plan for households when economic conditions turn ugly and that should be planned out and written into a contract in the mortgage.

This is the kind of thinking that I'm hopeful we'll get around to before this crisis goes on too many more years. I'm hopeful that we can move ahead to a better kind of mortgage that will make things normalized in the future.

Stay tuned for more of our interview with professor Shiller tomorrow on

For related Foolishness: