Here is something that I think explains SOME of why NEW homes cost more in CA: Because it takes a long time to get land entitled (permitted for building houses) and a lot of environmental regulations have to be dealt with, developers demand a much larger profit to build in CA vs. other states. Developers are more than willing to take on the challenge but they want a much larger profit to compensate for the added time and risk involved. This results in high land valuations for buildable lots and higher construction costs.

The above fails to fully explain, however, why CA prices have doubled over the last 5 years while TX prices have been flat. You would think the two states would maintain their relative price differences.

I don’t think the market will continue to bear these high CA costs because people just don’t make enough $ to keep paying these high CA prices. Land values will fall due to lower demand and construction costs will fall due to lower demand for labor and materials. As for the builders’ profits, I have a hunch they could cut their profits quite a bit and still be in the black. Whether you’re talking about new homes/condos or resales, buyers have been willing to pay these ridiculous prices primarily due to “irrational exuberance”. That is now unwinding.

Mazayako hit the nail on the head. You’ll hear and read of those offering up lame-brained excuses of why the prices have gone up, but do not be fooled – it’s simple supply and demand.

Such was the case for the past several years, as speculators bought up a large chunk of the supply of homes. Now there is a huge glut in supply and the speculators have moved on to more fruitful investments. It’s just a matter of time before home prices come down to more realistic, historical mean levels.

Be patient though, it’s like steering an oil tanker. The processes are already in place for a steady decline…they have been at least since August of 2005, the time at which the NAR calls the peaking of prices. Notice that there are many posters here noticing price declines of 15-20% or more declines here in SoCal, not to mention the huge inventory and extended day on the market. Yet the mass media (CNN.com, et al) continue to focus on the NAR who show their stats that home prices have declined only 1-2% nationwide? Such media will also pay heavy mention to many markets that have appreciated in value, such as East Gish, South Dakota or Backwoods, Oregon (made up names). It’s all very misleading if you ask me. Just remember who buys all those ad spaces (realtors, bankers, etc.) with the media and that will tell you all you need to know.

I’ve said it before: there are many, nay a majority, of folks out there that stand to benefit from falsely inflated home prices: local, state, and federal governments, politicians, radio, TV, and print media; realtors, appraisers, bankers, brokers, investors, current home owners, retailers, auto makers, developers, contractors, the list goes on and on. Basically everyone except current non-home owners. Feel free to chime in if there’s any group I left out.

I believe that in the 1950s there wasn’t much of a difference between California and the heartland. The price gap widened more and more in the last 50 years.

My theory is that new immigrants on the Coasts drove up prices. Most immigrant come from poor countries where the home price to income ratio is very high. Relative to income, houses are cheap in America. I believe, this along with other reasons explains the home prices in coastal metropolitan areas.

For example, lets look at Little Saigon in Orange County (Santa Ana, Garden Grove area). Vietnamese immigrants are willing to pay $700k lousy old houses. Houses in Vietnam cost about $100k but income is only about $100-$200 per month. How do people manage? They stretch and find ways.

It’s the same for Hispanic, Chinese, Eastern European, and other immigrants.

Falling interest rates, speculation, and the total abandonment of lending standards has caused the price to balloon. If interest rates on mortgages were 8%, do you think that these houses would have high prices? The Fed panicked and lowered interest rates to obscene levels that were not justified.

Plus, the bank of Japan has been flooding the world with cheap money to avoid deflation.

Fees

As a person who is not intimately involved in the financial aspect of building homes, but is “in” the industry, I can tell you that there are many factors that make a home in San Diego/California more expensive than Texas.

Environmental fees were mentioned, that is true. Texas does not have as many environmental regulations as California. There are also many more fees and requirements imposed by local agencies, cities, and county gov’ts. There is also fees for checking the plans, and fees for making sure certain things are built. For example, sometimes the agencies and gov’ts will require that you not only build sidewalks for the road leading up to your new homes, they will also require you to put in money in a fund for drainage.

Some people will interpret this post as a justification for the higher prices of today’s real estate. That is not necessarily true, but most people are not aware of the high costs of fees (i.e. taxes) that go into a house. From start to finish, it can take five years or more to build a house. The carrying costs for such an investment and doing that for five years is pretty high.

run up was due to speculation by investors and financially illiterate buyers participating in a buying frenzy using exotic loans due to an irrational fear of being priced out forever.

the whole run up is going to reverse itself with a long term (probably 6-7 year) decline of 40% or more.

mixxalot, tell me about it. Last year my husband and I figured out that a 20% downpayment for a below standard house in LA paid for a property outright in Buenos Aires, Argentina, where we are from. I remember thinking at the time that it would not take people much longer to figure that out, considering our globalised world. There are a lot of unknowns involved in doing something like that (countries south of the border are unstable and unreliable, remember?), but there is the advantage of owning something outright. It is truly a roof over your head, but that’s about it. My advice, only buy something if you think you will live in it some day