I question the 7-8% figure even as historical appreciation, much less near future appreciation. I don’t have California-specific numbers, but I just did a calculation for a post on another site using Rober Shiller’s national housing price numbers. The total appreciation for 1950-2005 equates to about 5% per year, but most of that is inflation. Adjusted for inflation, the 1950-2005 appreciation is about 1.1% per year. If you take out the unusual increases of the last few years and use 1950-2001, it is closer to 4.6% unadjusted/0.4% adjusted.

Generally speaking, both housing appreciation and interest rates tend to track with inflation. Over the long term, investment in residential real estate is a great an inflation hedge, and if you want a diversified portfolio of investments then I think that’s a good thing to have. If inflation really takes off and you have loan already locked in with a low fixed rate, you win and the bank loses.

All that said, you are right that timing is important, because buying in at the top before a significant decline would create short-term equity losses so large that even the inflation-hedging aspect would be ruined. So I would suggest that now is not the best time to buy in California. Check back in a couple of years.