Occasionally you may encounter a host which has somehow assigned itself an IP address in the 169.254.0.0/16 range. This is a particularly common symptom of Windows machines which have been configured for DHCP but for whatever reason are unable to contact a DHCP server. When a host fails to dynamically acquire an address, it can optionally assign itself a link-local IPv4 address in accordance with RFC 3927. Microsoft's term for this is Automatic Private Internet Protocol Addressing (APIPA).
The purpose of these self-assigned link-local addresses is to facilitate communication with other hosts within the subnet even in the absence of external address configuration (via manual input or DHCP). Unlike in IPv6, implementation of IPv4 link-local addresses is recommended only in the absence of a normal, routable address. Hosts pseudo-randomly generate the last two octets of the address to mitigate address conflicts. Because of the broadcast nature of some local networking protocols (for example, Microsoft's NetBIOS), hosts may be able to detect one another even without any preexisting knowledge of the address scheme.
However, in practice, these auto-configured addresses tend to do more harm than good, particularly in SOHO networks. Receiving an IP outside of the expected subnet carries more potential for confusion and frustration for end users than does receiving no IP at all.