We have definitely seen unsustainable appreciation in the housing market. Where I live, the SF bay area, has seen some unbelievable housing costs. This, alone, isn't too bad; the bay area has a long history of having a high cost of living. But the rate of growth in the economy has been slow during this "recovery". The Consumer Price Index doesn't indicate that there's any strong inflationary pressures yet (although there's debate about that, too).
But the larger problem is not prices, it's saving versus spending. Americans are saving less money than ever. We rely on credit purchases paid by monthly cash flow, a vulnerable system. And this mentality is seen at the macro scale, as the government borrows money against the annual GDP (i.e. the deficit). We want to buy lots of stuff, we want to do it cheaply, and we want to pay later -- preferably much later.
This consumerism produces such wonders as Wal-Mart. Americans can furnish their entire homes at unbeatably low prices! How did we get so much buying power? Why are these items so affordable? Besides spending on credit, we import these goods at artificially low rates. We import so much from China that, if Wal-Mart alone were a country, it'd be China's sixth-largest trading partner.
China has forcibly held their currency at a fixed exchange rate with the US dollar. This prevents currency revaluation for accounting for differences in national production. The artificial exchange rate means cheaper products flowing into the US and high levels of employment in China. But we are the ones paying for it, with a high trade deficit. China accounts for one fourth of our national trade deficit. Who's underwriting the growing national debt? Among others, China. Have you ever been caught by Citibank offering you easy credit with a card in the mail? China appears to be doing the same on an international scale.
Now I'm not trying to say that this is all China's fault. Their currency manipulation is questionable. But we're the ones falling for it! we're complicit, because we get cheap stuff now. And, dammit, that's the American way!
So what are we facing down the road? Estimates say that the Chinese Yuan is undervalued by about 40%, which would translate to a decrease in American purchasing power (not 40% -- the effect would be diluted). Will it spur domestic manufacturing to take up the slack? In the meantime, will the U.S. suffer from inflation? The Fed has tried to keep on top of inflation but it's betting on economic growth; if there's a collapse in the housing market and increased CPI, it could get ugly. Fast.