Indeed, "irrational exuberance" describes the current housing market. There is absolutely no fundamental or economic reason why prices are this high except for "greed and fear" which is a typical behavior in a bubble environment. Greed, because everyone wants to buy what their neighbor and co-workers buy. Fear, because if they don't buy now, they are afraid that they might miss the boat! This behavior turns into a vicious endless cycle until the bubble eventually pops.
Home prices have appreciated too high too fast for quite some time now especially at the coastal states. This behavior is exactly like the Nasdaq bubble back in 2000, but the housing correction will be much worse and painful. Since my family is getting bigger and may need to upgrade, I've been doing a lot of research on housing for the past two years. But I can't justify paying $800K for a $500K house. It doesn't make any sense. Prices are absurd and it's just a matter of time that house values plummet 40-50% from the peak. This inevitable correction will get prices in line with personal household incomes as well as the 50-year historical trend for real estate prices. There's just no other way around this.
A few reasons which I believe will cause a housing downturn within the next few years:
1. Oversupply of inventory.
2. Many adjustable loans (like $1 Trillion) and interest only loans will reset, forcing many people to foreclosure since most of these have "introductory rates."
3. Less than 20% of Californians could afford a home. The last time this happened, we had a major real estate correction.
4. Home price disconnection relative to rent and household incomes.
5. Interest rates going up. But not necessary for correction to occur.
6. No more flippers and speculators.
7. Home prices have absolutely no reason to go up 10%+/yr. Period. People don't realize that home prices merely track inflation (~3%).
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Can I Afford a House in the Bay Area?
When Is a Good Time to Buy a House?
