As prices go up, the key question inevitably comes up: How far can they go? Everyone has an opinion. A new bubble on the horizon? Should you wait till prices drop? In our opinion while there surely is a lot of hot air in the market, it’s not quite a bubble that will pop with a precipitous drop in home prices. There is some air that needs to escape and that will play out over time unless interest rates rise, then you will see a sharper decline in prices or at least rising inventory. LA Curbed has a commentary on recent articles regarding the subject. Basically their premise is: shouldn’t the average household be able to afford the average home? While that might not be exactly the goal, the farther away household incomes are from the average income it takes to afford the average home in the region, the more unaffordable housing is. In the height of the bubble, I did a similar study which showed that it would take 77% of the average household’s salary to pay for the principal, interest, taxes and insurance on the average LA County House! That’s 77% gross (pre tax). How were people doing it? Well, the study is based on a fully amortized payment but people were taking out interest-only loans and in some cases, paying less than the interest. They were also doubling up (two families) to afford one house or only buying the house in hopes of sustaining the house only long enough for it to appreciate $100,000 and sell it. In the absence of crazy financing and stupid expectations, we shouldn’t see these kind of numbers. Today, while prices are high, lenders are qualifying people up to the limits of their proven affordability. Buyers should check their expectations and stay out of the market if they are betting on appreciation and not buying the home as a long term residence.