You may recall that, starting a few months ago, we began wondering on this blog if rising California home prices are back in “bubble” territory. Well, it looks like we are in good company. Business Week reports that the Fitch Report thinks so too:
“Home prices keep rising—and not just in some markets. For the first time since 2005, each of the country’s 50 most populous cities are seeing higher prices. While that could be a good sign for the economy, the market is showing signs of overheating and the current pace is not sustainable, according to a new report by Fitch Ratings.
“The report regards home prices across the country as overvalued by about 17 percent. Conditions are worrisome in several markets, most of them in coastal California, where homes are more than 20 percent overvalued. San Francisco and San Jose will set new home price records in the next six months, according to Fitch. While Bay Area tech companies are booming, the region’s economy isn’t growing nearly as fast as the ‘unprecedented’ home price gains, making the market nearly 30 percent overvalued. Current conditions in the heart of Silicon Valley are akin to ‘the environment in 2003,’ the report notes ominously, ‘three years into the formation of the previous home price bubble.’ “
Which goes to show that basic economics works. For several years now, your friendly Uncle Ben has been holding interest rates down, down, down, which means that monthly payments on home mortgages are also down, down, down, which means that total home payments homes began to look cheaper because (a) they were cheaper indeed after the bubble popped, and (b) people make decisions to buy homes on the basis of their monthly payments. So they have been snapping homes up at 3, now 4%. Surprise, surprise!
But wait until interest rates go up as they inevitably will, and so do monthly mortgage payments. Oh, boy!