Housing prices were reaching the stratosphere. Most real estate markets were seeing double-digit annual gains.

How distant that era seems now.

Investors today are contemplating a financial world in which most assets, from emerging-market equities to junk bonds to commodities, are at lofty levels compared with any long-term measures.

Sure, the global economy is booming. Sure, earnings are at record levels. Sure, economic conditions look excellent. But the housing market meltdown is a timely reminder that none of that is going to matter if you simply pay too much for an asset in the first place.

Shares of KB Home, for example, touched a peak of $84.20 a share on July 20, 2005. The homebuilder saw its sales double in just three years while its share price more than tripled. In June of that year, the company announced that quarterly earnings soared 67%, and it raised its guidance for the full year.

Yes, some people at the time were pointing out that it was all a massive bubble. They were even saying house prices were wildly overvalued and that in large parts of the country -- especially places like the Southwest, where land was plentiful and cheap -- they were bound to collapse.

Not so Karatz. In June 2005, as his company announced record earnings, he upgraded full-year forecasts and insisted to analysts on the conference call that the future looked bright. "It was a terrific first half," he said. "Our outlook for the year if favorable."

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