Major reason for possible bubble bursting is interest rate hike so short the bonds? HOw much I guess depends on how much you think your house would get hit. Ex 400K house at 15% haircut is 60K. Hmmm. How many bond contracts should you short to make 60K? ...
Japan had both their stock market and real estate markets collapse. Real estate values went way down I believe. I wonder which came first? I think it was the stock market. Also, I think that before all this happened the government had imposed strict limits on interest rates. At the time they were really low if memory serves, something like 2.5%. There was a lot of speculation at the time about why it was that the Japanese people were willing to save such a high percentage of their incomes when the banks were only paying them squat for their money and the government was worried that the saving rate would go down. I'm not 100% sure that I have my facts straight because it's from memory and it was quite a few years ago but if it is correct there are a lot of similarities to our current situation.
One thing about the Japanese assets is that they were all linked. If a bank loaned you money to run a business, then you bought their shares, and they bought yours, and neither of you ever sold as sort of a condition of doing continued business. This web was ubiquitous and I also think there was some severe penalties for selling property. Real estate was mortgaged to buy shares and vice versa. The whole thing was wired for a bubble. Eventually, the bubble burst.
So with all that has been said and you lived in an overheated market like I do (southern cal) would you buy now or would you rent?
I say rent. But i am in florida and real estate varies a lot with location. Considering that you are in CA and the tech companies are so down, you might be in the same boat. The only exception to that might be waterfront property, since environmental protection eliminates the creation of "new" waterfront by making canals and draining wetlands, which used to be common practice. Most of where people live in the southern half of florida used to be wetlands. I know people that are buying homes built 30 yrs ago on man made canals that are illegal to create now. They buy for the land value only and demolish the old house and rebuild.
Both Rigel and chasinfla are right -- Japanese gov't policy and cross-holdings exacerbated both the run-up to the bubble and the continuing sorry state of affairs in the land of the rising sun. Japan has had effectively negative interest rates in recent years and masive public spending with no significant turn-around in the overall economy. Bad loans and bad debtors still plague the system and starve worthy companies of needed capital. Here the U.S., we have the makings of a sequential 1-2 bubble. First, the internet/stock market bubble made a lot of wealthy people feel weathier and want to buy big houses and luxury goods. Second, the collapse of that bubble and attendant boom-economic times, forced the Fed to cut interest rates to extremely low levels. Ultra-low interest rates then let people of more modest means go on the current re-fie, real-estate buying binge. (I'd bet that more than a few home buyers/re-fiers are doing so just in case they lose their jobs). Demographics also has an impact -- a huge chunk of baby boomers are in their peak earning years and are starting to look seriously at retirement. Big question will be: what happens when consumers realize that they don't need to buy a new SUV every year or buy hand-squeezed ultra-extra virgin olive oil grown only on west-facing slopes of the 3000 year-old orchards of some Greek island? Many consumer goods companies are getting squeezed by the hourglass-effect (consumers want either the cheapest possible version of the product or the most expensive luxury version of the product). A slump in real estate prices will scare a lot of owners of luxury homes (and soon-to retire boomers) and kill the high-end of the consumer goods market. Is it time to buy Wal-Mart and short instruments tied to jumbo-mortgages? Never a dull moment! -Traden4Alpha
What really is frightening me about buying right now is that I cant find ONE single person who lives here that thinks the market is going to slow down let alone decrease. In fact the mentality from some people I have talked to is "I lost money in tech stocks but I am going to more than make up for it in real estate". Scary.
Japan can make housing much more affordable by simply allowing land now owned by rice farmers to be re-zoned for residential/comercial use. Their rice farmers are notoriously inefficient (compared to other countries) but they take it as a badge of pride that Japanese rice is the best in the world. Hubris is very very expensive.
First, nobody has mentioned how much real estate declined in Japan- the answer is 75%. That's right 75%! Second, one reason for the ridiculous appraisal values is so that the city/state can realise higher tax revenues. This is especially true in soCal, where the budget problems are well known. I might even go so far and say the state/town/city is in cahoots with the appraisers- maybe by way of incentives or kickbacks, I don't know- and I don't mean everyone either... Last, like Traden4Alpha said this is a 1-2 Bubble. Personally, I think the powers that be wanted it this way. What better way to separate the sheep from their cash? If someone's goal is to fleece the population, what better way to accomplish that fact than with a 1-2 speculative Bubble? All IMHO, of course.