For San Francisco real estate, if you have to ask ...

On one hand, Richard Hom knows better. Yes, this is California, where starter homes tend to have executive prices. And yes, interest rates unseen since the days of FDR have stirred homebuyers into a frenzy.

Even so, there's some part of Mr. Hom that refuses to let go of the idea that a single man who makes $90,000 a year should be able to afford a condominium. At least for now, though, it's just a dream. "I just can't afford it," he shrugs after a six-month search.

As a house-hunter in San Francisco - where the median home price tops $615,000 - Hom is at the extreme edge of a nationwide trend that's most acute in California. In the rush to purchase a home before interest rate rise, buyers are bidding up properties beyond reason - increasingly leaving even middle-class families on the outside and placing the housing market on shaky economic footing.

The rise in home prices "is higher than is justified" by economic factors, says Cynthia Kroll, a regional economist at the Fisher Center for Real Estate and Urban Economics at the University of California in Berkeley. "I would not be surprised if we see a correction."

For the American economy, which has relied on housing figures as its only consistently good news in recent years, it's a potential cause for concern. For Hom and buyers like him, though, it might not be such a bad thing. The bids he's put in bids on condominiums have routinely been above the asking price. In every instance, though, he never came close to signing a contract. Usually, he's been one of as many as 10 bidders, and he has refused to inflate the price beyond what he feels is the value of the property.

"It's frustrating," says Hom, a clinical scientist for a Bay Area biotech firm. "I'm seeing units go up 10 to 15 percent because of bidding wars."

This month, six of the nine Bay Area counties set new records for their highest median home prices in history, and two of the other three were no more than $7,000 off their all-time high, according to housing analyst DataQuick. In Los Angeles, meanwhile, only 20 percent of residents can afford the median home price. Fresno recently clocked in as the metro area with the fastest-rising home prices in the US.

Admittedly, such spikes not uncommon in California, where an unheated outhouse can get multiple bids during good times, it seems. What befuddles analysts, though, is that these are not good times. Here and nationwide, the housing market has defied the gravity of a host of poor economic indicators. In Santa Mateo County - the region hardest hit by the dotcom bust - home prices rose 9.5 percent in the past year.

The low interest rates play some role, as do mortgage lenders, who have increasingly made more complicated and risky loans to get buyers into homes. Underlying these, however, is the simple matter of supply and demand, and while the same economic forces are at work from Boston to Seattle, nowhere are they so pronounced as California.

"It's almost impossible to get housing approved in the dense coastal areas," says Leslie Appleton-Young of the California Association of Realtors.

Indeed, legendary congestion and a latent environmental ethic have made coastal California one of the hardest places in the United States to build a house. Add to that the state's spectacular population growth, and California is almost always in a housing shortage. Thus, as house-hunters look ever further afield, the inland Central Valley has become the state's fastest-growing construction area.

"Places in New England have similarly constrained building, but they don't have that kind of population growth," says David Stiff, an economist at Case Shiller Weiss, a real estate analysis firm in Cambridge, Mass.

Like the dotcom dream before it, the housing boom seems to have broken free from the cycles of the free market to remain in a state of permanent growth.

"We've seen California schools struggle, jobs struggle - all the things should affect housing - and they haven't done anything," says Peter Fletcher, a Realtor for Windermere Properties of the East Bay in Pleasonton, Calif. "In almost every case, I have multiple offers."

But also like the tech boom before it, analysts say the housing boom will eventually end. No one expects a collapse, given that the demographic imbalance will maintain demand. But as interest rates rise, the intensity of the boom could burn itself out.

With prices rising faster than income, "I would consider both northern ... and southern California to be fairly risky," says Mr. Stiff, a status the firm also gives to New York, New Jersey, Connecticut, Massachusetts, Rhode Island, New Hampshire, and Hawaii. "It's hard to imagine how prices could continue to go up far into the future."

Top 10 US metropolitan housing markets

California had the three priciest housing markets at the beginning of the year, and also the three fastest rising, out of 127 markets nationwide.

Metro area state Median home % change value in 2003
San Francisco CA $574,300 11.2 %
Orange County CA 526,800 21.2
San Diego CA 456,700 20.4
Boston MA 406,800 5.3
Honolulu HI 399,000 14.0
Los Angeles CA 382,200 24.5
Nassau/Suffolk NY 374,900 12.4
Bergen/Passaic NJ 372,500 6.4
New York/NJ/ NY/NJ/CT 353,000 10.2
Long Island
Middlesex/Somerset/ NJ 303,800 6.9
Hunterdon
US median 171,600 6.6

Source: CNN/Money, with data from the National Association of Realtors

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