My youngest son lives in San Diego, where housing prices have been increasing by more than 20% a year. How much of that is driven by conventional supply and demand, verses demand driven by speculation? I don't know, but it seems that prices can't just keep increasing that fast for too long before it becomes completely unaffordable for anyone to move there.

In many parts of the country*, speculation demand (investment properties rather than owner occupied homes) is driving up the prices, perhaps at an unsustainable rate. It wouldn't surprise me a bit if something causes those local bubbles to pop. A high percentage of homes in those markets are being purchased with "interest only" loans, with some pretty steep balloon payments at some future time. As long as prices keep rising and people keep selling their homes before the balloon payments come due, then this strategy can work. However, if there is an economic slowdown (as happens periodically), then you could see a lot of people owning properties they can't afford.

I lived through a burst housing bubble here in Colorado Springs that lasted from about 1987 through 1992. It was grim. My home was worth about $10,000 less than I owned on it (lucky me bought at the peak of the market in 1986), so I would've had to pay a lot of money to get rid of it. Fortunately, I was able to stay put until the market had turned around. Back in 1991, "60 Minutes" did two stories on Colorado Springs about a month apart. The first was "The Repossession Capital of America." Our housing market collapsed for a variety of reasons. In some neighborhoods, it seemed that only every third house was occupied. The others were HUD or VA repos. It was grim.

The other "60 Minutes" story was about a developer named Frank Aries who'd made millions, then stipped out of the country leaving the Savings & Loans (and the taxpayers) holding the bag.

Unlike stocks, houses will always be worth something. There were untold billions lost during the Dot-Bomb stock collapses with people ending up with worthless pieces of paper. However, if housing prices in an area drop 10-20%, it would hurt a lot of people, especially those holding interest only mortgages on homes that are worth less than the owed amount and where demand for rentals has dropped. I knew people back in 1988 and 1989 who just walked away from homes they could no longer afford and couldn't possibly sell. It wasn't pretty.

*Houses aren't appreciating very fast (or at all) in some places. I had lunch this afternoon with a contractor from Dayton, OH. He said the local market has been depressed there for a long time, with the local population decreasing by tens of thousands of people over the last 15 years or so.