A BULL, A BEAR AND THE BUBBLE / What’s ahead for the real estate market? Two respected analysts — and now authors — hold markedly different views
Talbott regards the latest data on the Bay Area housing market as mounting evidence for his prediction: rising interest rates, decreasing appreciation, 10 straight months of declining sales and, in January, the lowest number of sales in five years.

The problem, he says, is that home prices are way overvalued — just as Internet stocks were during the 1990s before that sky collapsed. As evidence, he points to the growing discrepancy between Bay Area home prices and rents, an indicator commonly used by economists to determine a property’s true value.

Novato’s RealFacts puts the average Bay Area apartment rent in the fourth quarter at $1,324; DataQuick calculates that the typical home buyer in December committed to a $2,867 mortgage payment.

“It paints a very scary picture,” Talbott says. “Something has economic value because it has cash flow. If you discount for general inflation and go back 120 years in history, you’ll discover that, in real terms, housing prices were relatively flat until 1997 — then (they) shot up about 70 percent.”

To buy these overvalued homes, he says, many consumers overextend themselves financially by borrowing more from banks. They end up paying an inordinately high percentage of their monthly income on mortgages. In Los Angeles, he points out, the average new homeowners, usually a young couple, are spending 55 percent of their monthly income on a mortgage payment.

But like everyone says – the Bay Area is the best place in the world to live! Isn’t it worth giving up living to live here?