I would say that since interest rates are too low it is distoring true supply and demand. It is sort of acting like a government subsidy on all things purchased with debt, which is why housing has been a little crazy as of late.

The Federal Reserve kept the overnight lending rate (1% for a long time) below the core inflation rate. This made incredibly easy money for lenders, and they lent as much as they could to a lot of people who wouldn't have qualified a decade ago. (Therein lies a "government subsidy" of sorts.) More buyers in the market means more people after a finite number of houses, which means higher prices. Builders build, and people "upgrade." The lenders that originate the loan usually sell it off quickly -- mine has been sold twice already, less than 4 years into it.

Interesting that nearly half of all new loans originated in California last year were interest only ARMs. (Basically a teaser rate with no repayment of principal for a few years.) Marginal home buyers get these kinds of loans because it's the only way that they can afford the payment at the ridiculous current prices. Just wait until the rates go up AND they have to start paying back the $1 million they borrowed!

There is a lot of speculation and a lot of perhaps misplaced confidence that the housing will continue to go up as it has. It probably will for longer than anyone would suspect, but not because it should. This may fuel people with more money than sense getting a second home as an "investment."

Case in point, I live a couple of hours from DC and I bought my house in October, 2001. I could likely sell for well over 50% profit if I wanted to, and I offered asking price on my home when I bought it -- basically fell for every trick in the Realtor(R)'s book. Not the smartest of moves. Do I deserve $60k of additional equity? No way! I paid top dollar for my home at the time. Did I and millions of others get a lot of appreciation? We sure did.

Regarding the appraiser theory, I have no clue. I think they at least need to do a CMA on the property. There is wiggle room as to which properties they can choose, but they breach ethical boundaries if it's too far out of whack. A friend of mine got a great deal on his home (like 60% of the appraised value) and the lender was about ready to pull the loan because they asked what was wrong with it! So there are problems with really high appraisals too.

So yes, home prices are ridiculous -- mainly because of years of easy loans drawing a lot of people into the buying mode.

Basically agree with the last post. It can mostly be attributed to three things. It first started back in the 90s with constant easing of the requirements to get a loan. Used to be your loan payment could only be 25-30% of your income. Now that number can go up close to 50%. Used to be you needed a reasonable down payment, now through all kinds of combination loan deals such as 80-10-10 etc you can basically use multiple loans to get the down payment and really be 100% mortgaged. This allowed more people to get into homes and drives demand. Then came the low interest rates of the last few years and that has led into the third thing which is speculation in the market. Everybody is talking about real estate as an investment. Just like everybody was talking about tech stocks in the late 90's. I have heard in some markets that 25% of the house purchases are purely speculative, basically being bought by investors for renting or for holding and flipping. All of this drives demand as well. Demand is driving the market and supply is trying to keep up with demand. Just like The Telecoms of the world were putting as much fiber optic cable in the ground as they could in the late 90s to meet the exploding demand from the internet which turned out to be speculative. Once that demand went away there was way too much supply of fiber. What happened to the telecoms? Some of the demand increases such as the easing of requirements to get a loan probably arent' going away. But slowly the cheap interest will be removed and when the fast appreciation stops the speculation will eventually dry up as well. What will happen to all the housing supply when some of this demand goes away? It will sit there. Housing is more complicated because you can't just move housing assets as easily as stock assets but supply is trying to keep up with false demand right now and when false demand goes away the result is usually a drop in prices due to over-supply. Just a matter of when the false demand goes away.

Appraisals are just representing what people are paying, not driving it. And increasing appraisals do not necessarily mean increasing tax bases. If everybody's house goes up the same amount you can have your house go up by 20% and not necessarily see an increase in taxes. This has been true in my area for some of the past few years.