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A concern I have is that the average household in the Los Angeles area (and many others) cannot afford the average priced house.

For example, I earn $100k a year, which is more than 95% of California's population. And yet the most expensive house I could finance would be about $300,000. The average house in my area is $500,000-odd. And I live in the "cheap" Valley; the Westside, where I'd much rather live, is pricier still.

I don't think the average homeowner in LA would be able to buy their house back today. And that scares me, since it means either incomes have to grow to match home prices, or home prices have to collapse.

The latter seems more likely. On the other hand, I've thought this virtually since the day I moved to California, and yet home prices have increased enormously since then.

I'd love to hear people's thoughts about this, since the present situation simply doesn't make much sense.

The same dilemma is facing prospective buyers in the Washington, DC suburbs. A single wage-earner is SOL, if they want a single family home...and townhomes are quickly becoming the goal of the "move-up" buyer.

One that already has equity in other real estate to be transferred to the new property.

Can you say, "Condo"?

Unlike equities, housing is a local market--so risk will vary by locale. The big risk is to those of your neighbors in the 500K McMansions who have hollowed out their equity and refi'd with an ARM. If the economy goes South, or interest rates rise, and selling pressure takes over, who's going to buy when all those places hit the market at once?

I'd sit tight and save if I were you. Those expensive places may be a glut at 300K in the not too distant future..

I don't know if "bubble" fits or not. But, I know housing prices can and do tank from time to time. I understand California has had a good run up, but then, so did the NASDAQ.

My guess is that you'd find that lenders are willing to loan you more money for a home than you think. With interest rates as low as they are, your monthly payment can buy a more expensive house than a year ago.

That's not the complete explanation, though. A lot of people can trade up using their appreciated real estate prices as equity for their new homes. That also helps bring down the amount actually financed.

I don't know if it's sustainable or not. The prices simply reflect the demand, and somehow people are scraping together the money to buy homes there. I don't quite understand it myself.

I've lived in housing markets where the prices were collapsing rapidly, and anyone who doesn't believe it hasn't been there. I couldn't afford to move to Southern California, because I'd want a similar house to what I have now, and I'm not going to spend several million bucks to get it.

The current situation benefits the people who already own houses. Mine is worth far more than I paid for it. I also have a rental property that is worth much more than I paid for it. If I decide to move, I will still have the same equity.
People younger than I have higher salaries than I did at the same point in their careers. They can afford houses, too.

But expectations have changed. My parents thought 3BR1BA was fine. I am happy with 4BR2BA2PR. Younger people seem to want either more BRs and BAs or to be closer to city centers (or maybe both).
We're a rich society. When is enough enough?