The recent surge in housing prices is driven not by speculative fever but by the fundamentals of supply and demand, says Raphael Bostic, director of the University of Southern California's Lusk Center Casden Real Estate Economics Forecast. A classic housing bubble is created by speculators hoping to make fast returns by buying homes and quickly selling them at higher prices. "When buyers see home prices rising, they decide to jump in to the market while they can still afford housing. This is perhaps the ultimate buy and hold strategy -- just the opposite of speculation," says Mr. Bostic. Population growth, immigration, the strong economy of the 1990s, and the lowest mortgage interest rates since the 1960s have helped to increase demand for housing nationwide. But supply has not kept pace with demand in many regions because of high land costs, opposition to development, builders' liability concerns and a time-intensive permitting process. Only when the supply-demand imbalance is restored will prices moderate, according to Mr. Bostic. In the San Francisco Bay Area, mired in the high-tech recession, housing prices are "going to be rocky for a while because the local economy is so sector-dependent," he says. "Until those things work their way out, the future will be unclear." In August, the median price for a single-family detached house in Santa Clara County, heart of Silicon Valley, was $540,000, up 4.7 percent from August 2001, according to the California Association of Realtors. The statewide media was $334,100, up 18.3 percent in a year's time, the association said. But Mr. Bostic says the fundamentals of supply and demand will tend to keep Bay Area -- and California -- home prices increasing over the years. "As long as the demand stays strong it's going to be hard for prices to moderate. The flip side is supply. If supply were to go up, that would ease [price] pressures," Mr. Bostic says. The USC professor says a bigger problem looms down the road for the state -- affordability. Figures from the Realtors' association show that current home prices statewide are so high that nearly three out of four California families cannot afford to buy the median-priced home. "Home prices could have an impact on the overall economy as employers wonder where their workers are going to live," Mr. Bostic says. "Lots of middle-income people have been leaving the West Coast to go to more affordable destinations. Part of that is driven by the ability to live more comfortably elsewhere."
