But a basic tenet of economics is that the value of an asset is whatever people will pay for it: It’s impossible to say an iPhone isn’t “worth” $300 until the day comes when nobody will buy it for that much.

I would argue this is only a half-truth at best. When we're talking about price bubbles & "what people will pay" for something, we've moved into territory shared by finance as well as economics. And in finance, there are two schools of thought - valuation based on trends (eg. technical analysis, in stock terms) and valuation based on fundamentals. Someone caught up in the housing bubble would have been using the former school of thought, thinking "the price is going up, that means the price will KEEP going up!" In reality the opposite is true - investment risk increases as price increases. Admittedly, homes are not stocks, but I strongly feel we can apple some of the same rules for market behavior to them.

Fundamental analysis, pioneered by investors like Benjamin Graham and Warren Buffett, offers a different take. The gist as it applies to home buying would be something like this: (1) Assess the value of the land on which the home is built, and the community the home resides in, (2) Assess the value of the craftsmanship that went into building the home, and the value of the components that comprise it, in order to (3) Decide if the price of the home accurately reflects all of the things that "make it up". If the market has undervalued the home, it is worthy of purchasing, as it can be sold for more in the future solely because of its inherent qualities, and not because of any herd-mentality that may grip the market at a given time.