This paper examines the relationship between housing supply and housing bubbles, suggesting that places with more elastic housing supply experience fewer and shorter bubbles, but may have higher welfare costs due to overbuilding during the bubble. The authors develop a model to investigate the interaction between housing bubbles and housing supply, finding that rational bubbles are impossible with elastic supply and a finite number of potential homebuyers. They also endogenize asset bubbles by assuming that buyers expect future price growth to resemble past growth. The empirical analysis uses data on housing prices, new construction, and supply elasticity to support the model's predictions. The results show that during the 1980s boom, more inelastic places had larger price increases and smaller increases in new construction, while more elastic places experienced temporary price booms but shorter durations. The authors conclude that the welfare losses from housing bubbles may be higher in more elastic areas due to greater overbuilding.This paper examines the relationship between housing supply and housing bubbles, suggesting that places with more elastic housing supply experience fewer and shorter bubbles, but may have higher welfare costs due to overbuilding during the bubble. The authors develop a model to investigate the interaction between housing bubbles and housing supply, finding that rational bubbles are impossible with elastic supply and a finite number of potential homebuyers. They also endogenize asset bubbles by assuming that buyers expect future price growth to resemble past growth. The empirical analysis uses data on housing prices, new construction, and supply elasticity to support the model's predictions. The results show that during the 1980s boom, more inelastic places had larger price increases and smaller increases in new construction, while more elastic places experienced temporary price booms but shorter durations. The authors conclude that the welfare losses from housing bubbles may be higher in more elastic areas due to greater overbuilding.