How can I know for sure when the experts can't agree? The economists at the UCLA Anderson Forecast say a bubble has been forming in California real estate for at least two years. Their rivals at the University of Southern California Lusk Center for Real Estate, insist there is no bubble.
I do think homes in California and other hot markets are overpriced relative to rents and incomes. This gap can't continue growing forever.
But the thing about bubbles is that they can go to insane extremes before bursting. Fed Chairman Alan Greenspan warned about irrational exuberance in the stock market in December 1996, more than three years before it peaked.
Bubbles typically burst when virtually all the doubters have been converted and buy into the frenzy. When there is nobody left to buy, the market collapses.
The fact that so many people believe real estate is a bubble tells me the party might not be over. Whether it ends with a mild headache or a major hangover depends on how long it goes on. That will only be known in retrospect.
Timing markets takes luck, not skill. When people correctly call a market top, it's like winning a game of musical chairs. These folks become famous for a while, but almost never repeat the feat.
If you own a home and are happy in it, ignore the bubble babble. You need a roof over your head, and over the long term, home prices tend to rise at least as fast as inflation.
If you want to sell your home and buy another -- perhaps a bigger one in a better school district or one closer to work -- and it won't send you to the poorhouse, go for it.
If it turns out you paid too much for your new home, you probably got too much for your old one.
The property taxes on your new home will be higher than if you had waited, but you can probably get them cut if you can show the value of your home has declined. (They'll go back up when property values recover.)
If you are downsizing from a large house into a smaller one, you'll win on one, lose on the other.
The big dilemma faces those trying to buy a first home.
If you wait, hoping for prices to come down or your income to go up, things could get worse before they get better.
If you can buy a house with a 30-year fixed-rate mortgage and a 20 percent down payment, plan to stay in it for at least five years and have an emergency fund in case you lose your job, I'd say do it.
Prices are high, but fixed-rate loans are near record lows. If interest rates drop, you probably could refinance at a lower rate.
If prices decline, you'll be kicking yourself, but they would have to fall by 20 percent before you lost your equity, and that would be a big decline by historical standards.
If you hold off, waiting for prices to drop, you run the risk that interest rates will be higher, offsetting the benefit of a lower price.
Of course most people who can afford a house with conservative financing already have one.
If the only way you can buy a home is by borrowing 90 percent or more of the value with an adjustable-rate mortgage, I would think long and hard. Many things could go wrong.
The housing market is booming because long-term interest rates remain stubbornly low, the economy and job growth are reasonably strong, many people don't trust the stock market, and hedge funds and other institutional investors are willing to buy high-risk mortgages from lenders.
There's a good chance housing prices could fall if long-term interest rates go up, unemployment rises and/or investors move on to other assets.
If you have a fixed interest rate and sufficient savings in case you lose your job, you should be able to ride out a downturn.
But if you're stretched to the limit and you have little to no equity and an adjustable-rate mortgage, you could be in deep trouble and maybe lose the house.
People who use ARMs assume that if interest rates shoot up, they'll refinance into a fixed-rate loan. But if housing prices have fallen and your equity has shrunk or if your income has declined, you might not be able to refinance, especially if lenders have tightened their standards.
Even with a hybrid ARM, which has a fixed rate for a number of years before it adjusts, you run a risk.
Most people who get hybrids figure they will be out of the house before the rate adjusts. But to paraphrase the bumper sticker, stuff happens. If you get a hybrid, be sure you can afford the house if the rate rises and you're still in it.
The difference between fixed- and adjustable-rate loans is small today. If you shop carefully, you can even find some fixed-rate loans that are cheaper than hybrids, says Rick Sharga, vice president of marketing with RealtyTrac, which tracks mortgage foreclosures and delinquencies.
I would especially avoid buying a house with an adjustable-rate interest- only loan or an option ARM. Both let you postpone principal payments for a number of years, and the latter lets you postpone interest payments, which are added to the loan balance.
When these loans reset, payments can increase substantially. Principal payments will be spread over the remaining life of loan, which means they will be higher than they would be under a normal 30-year loan. And if interest rates have risen, the monthly payment will skyrocket.
If you're considering one of these loans, ask yourself how you will pay it off under a worst-case scenario, if you can figure that out.
Option ARMs, in particular, are insanely complicated. It's almost impossible to compare them. I doubt whether many loan agents, much less borrowers, truly understand how they work under various scenarios.
Whatever you do, don't buy a house without having a contractor's inspection. That would truly be bubble behavior.
Clarification: In my Sunday column, I quoted a Federal Deposit Insurance Corp. study saying that it found 54 instances of regional housing price booms between 1978 and 1998 and only 21 regional busts. I should have said that only nine of the busts were preceded by booms, which is why the FDIC said only 17 percent of booms ended in busts.