Is California's Wild Housing Market a Sign of a Bubble?


Housing bubble: California may be the site of a new one.California is the comeback kid of the housing recovery. Though home prices are making annual gains not seen since 2006, The Golden State sticks out as one where they are on a startlingly dramatic swing upward. California prices have posted double-digit hikes on a year-over-year basis for eight consecutive months. In other words, they're rising fast -- very fast.

And now California is sweeping the top cities where home list prices are rising the fastest. Six of the top seven cities -- which all saw list prices jump more than 20 percent year-over-year in February -- are in California, according to Realtor.com. That's great, but perhaps a little scary.

As some experts have been warning recently, housing conditions like California's could be an early sign that we're headed into another housing bubble. Buyers all over the state are getting into bidding wars, home prices are on a steep incline that some say is unsustainable, and open houses are once again attracting a frenzy of house hunters. This is what we saw in 2005 and 2006. So should California, despite all its encouraging news, be making us worried? Not necessarily.

"It's important to put these increases [in home prices] into perspective," said Errol Samuelson, president of Realtor.com. "Despite these gains, home prices nationally in January were still 21.4 percent lower than they were at the peak of the housing boom in June 2006. In California, the losses were much worse. Homeowners lost more than half the value of their homes when prices fell. Today, California prices are still 34.8 percent below the peak level. California prices haven't even recovered half of what was lost."

There's another reason today's sharp increase in prices differs from the days of the housing bubble: There are real fundamentals behind them. It's not pure speculation. Jed Kolko, Trulia's chief economist, noted that solid job growth in California's coastal areas are putting more buyers in the market, allowing sellers to raise prices because of demand. At the same time, housing inventory is lower than it has been in a decade, another element that typically drives prices higher. (But that should ease as more homeowners become confident about trying their hand at selling.) Plus, Samuelson added, government regulations are preventing another housing boom based on unqualified buyers being able to snag mortgages that they couldn't afford in the first place.

So for now, what's happening is just a strong recovery, not a bubble. Still, it is rather surprising how fast prices are bouncing back in California. Click through the gallery below to see the seven cities where list prices are rising the fastest.


See more:
In the 10 Best Cities for Jobs, Hot Housing Markets, Too
10 Best Cities to Own a Home
5 Best Cities to Sell a Home Right Now

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