Is California in a Housing Bubble?

The following study examines recent claims that California is in a second housing bubble within seven years. The most recent housing bubble, which burst in 2007, is reviewed to determine the ramifications a housing bubble can have on an economy. Factors such as monetary policy, housing starts and Gross Domestic Product are contrasted independently and collectively for signs of a potential housing bubble. The role of Government sponsored agencies (GSEs), Freddie Mac and Fannie Mae are also inspected for their respective impact on the previous housing bubble and subsequent changes they instituted along with banks to prevent future bubbles. The paper also introduces empirical evidence to show that income per capita alone explains 96% of the increase in home prices in California, while adding other fundamentals variables decreased the explanatory power of the regression. Fannie Mae’s monthly housing survey is examined to capture the current attitude and expectations of the housing market, which correlates with potential housing market bubbles. After careful analysis, this study concludes that California is not in a housing bubble which is based on income per capita alone explaining 96% of the home price increases in California, Fannie Mae’s survey not supporting evidence of a housing bubble and tightening lending policies by banks and GSE’s.