California Housing Boom or Bubble?

For the people who don’t live in California, you may be thinking that I got to be joking to have a gain of $260K on a small condominium, which can be more than the price of a single family house in some other states. But for the people in California who are not home owners of a single family house, this is a harsh reality that they need to face everyday. Most people can’t ever make up the wealth gap of $300K to even $600K comparing to the lucky homeowners.

For the people who argue for the continuing of the housing boom, their list of upside reasons is endless: California has very good weather, plentiful jobs and diversified economic growth, increasing population & immigration, etc. But none of them can tell me why the housing price was half or even a quarter of the current price eight years ago, when everything that they claim was also true six years ago. It’s almost like saying that group A (in 2000) took a placebo pill (which is the good weather & economy), and that group B (in 2006) also takes a placebo pill, but group B recovered from the disease, mainly because of the effectiveness of the placebo.

To me, I believe that the single most influential factor was the interest rate cuts by US Federal Reserve. The list of why California is better may help the boom compared to mid-west, but is definitely not the direct reason. Without holding the short-term interest rate at 1% for more than 1 year, real estate wouldn’t never go as high as it did without any doubt.

I’m personally in the bubble camp for 6 years and counting. The entire process of watching the house that I really want to buy for my family, to keep going up without an end in sight, has been simply tormenting. I wish 6 years ago I was either wealthier or had my current salary. Everytime when my networth finally increased by another $100K, the housing price simply has gone up by more than that amount.

So when will the housing stop going up, or will it? According to Didier Sornette, the author of “Why stock markets crash”, his prediction is this year in mid-2006:

Or click on “Is There a Real-Estate Bubble in the US?” at his web page:

I don’t know if it’s true, but his theory on the mathematical behavior of an unsustainable bubble is the one of the most interesting readings so far that I’ve come across.

Markets can be temporarily (or for a long time) out-of-synced with the fundamentals. The market price is always the fair price at the current moment between buyers and sellers, but that does not preclude one to come up with a valuation measure on its price. I’ve constructed a comprehensive housing valuation calculator to objectively assess the price against the owner’s equivalent rent (which is used in CPI or Consumer Price Index calculation). I don’t know how much fudging the bureau of labor statistics has done in the housing component of CPI. But certainly housing price has out-paced the owner’s equivalent rent used in CPI, when almost 70% of the people are home owners, and only 30% are renters. Talk about fudging CPI. If they start to switch over to use housing price while it’s in decline, they can certainly produce even lower CPI both at going-up and going-down of the housing market.



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