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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: http://arxiv.org/PS_cache/physics/pdf/0506/0506027.pdf

Or click on "Is There a Real-Estate Bubble in the US?" at his web page: http://www.ess.ucla.edu/faculty/sornette/books.asp

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.  Talked 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 ramp-up and ramp-down of the housing market.

Well, I should really qualify the title of this, by not buying the home in a bubble.  Whether our current housing market is a bubble or not is debatable.  Under normal circumstances however, buying a home is usually your best investment.  And the reason is inflation.  Historically, housing price tracks inflation fairly well.  Since inflation is seldom zero, or negative, buying a home is a financial transaction that has two very big advantages, assuming that you acquire the home with some amount of mortgage.

1. Leverage: A leveraged transaction means that your return (or loss) is magnified by the amount of leverage that you use.  In a leveraged transaction, you use less amount of cash to take control of a much bigger amount of asset with debt.  If the asset goes up in value, then you are rewarded with extra returns.
2. Inflation: Your home value is almost guaranteed to go up in value in a very long term perspective (I’m talking about 10+ years) because of inflation.  Since you repay your mortgage debt by cash gradually, the debt burden actually goes down as your wage gets inflationary increase.  $100K owed now will be less burdensome 10 years later, even if you have not paid down a cent in principal.  Inflation is the best for debtors, but worst for creditors.
3. Tax: At least in the United States, federal tax laws clearly have a preferential treatment for homeowners.  You can deduct mortgage interest which is also AMT-deductible.  Possibly you can deduct your usage of home as home office.  The property tax is deductible too.  And the best thing is that the capital gain on the home is usually tax-free under $250K for singles, and $500K for couples.

That is why real estate is often touted as a good investment because it is really true, with the following assumptions:

1. You didn’t buy it in a bubble.
2. You have sufficient positive cash flow to carry you through enough years for inflation to increase your return.
3. You can take good care of the home or property.

I have constructed a Buy vs Rent calculator for you to experiment the outcomes of the two choices.