Timing the market: if homebuyers can wait, they should--because the worst is still to come.

THERE is little doubt that the prospects for housing in Los Angeles are good in the long run. With our climate, strategic location, world class universities, and of course our high-tech and entertainment industries, it is clear that demand for housing in the region will continue to grow strongly in the years ahead.

But the question for potential homebuyers today is not whether the prospect for housing is strong in the long run. The question is if the price you will pay for a house today is in line with what this prospect is. The difference between these two views is the same as the difference between asking if the long run business prospects for a corporation are good and asking if the stock price correctly values the potential future profitability of the firm. Indeed this is the definition of a bubble--when the market price of an asset is bid up by massive speculation to a level that the long-run returns that asset provides cannot reasonably be expected to equal.

In recent years, speculators drawn to the rising prices in housing combined with lenders who were willing to provide massive amounts of capital to pretty much anyone with a pulse pushed prices to an unprecedented level. In 1997, the median house in Los Angeles County cost $221,000 in today's dollars (i.e. adjusted for inflation). Last year that same median house cost $584,000, an overall increase of 163 percent over nine years. This is 11.6 percent per year, a 16.4 percent pace since 2001.

Never has California experienced such a rapid extended period of housing appreciation. The 1980s bubble saw an increase of only 48 percent over four years. That works out to 10.3 percent per year from trough to peak (inflation adjusted). In the 1970s the overall increase was 90 percent over six years or 11.3 percent per year. Long-run real price appreciation in Southern California averages about 2 percent a year.

We have all heard the same set of excuses for the high prices. Low mortgage rates have been a favorite justification. What isn't mentioned is that it's the change in mortgage rates--not the level--that matters for home price appreciation. Mortgage rates were lower than they are today in the 1950s and '60s and nothing approaching this level of appreciation was experienced. And of course, mortgage rates stopped falling in early 2003 and the majority of price appreciation has occurred since then.

Another story is the home shortage. But here you aren't told that the shortage is at the bottom end of the market--low-rent apartments for the low-income immigrant households that have made up much of the population growth in the region over the last decade.

No bubble?

I could continue, but the best point I can make is that those calling for a quick recovery in the housing markets are for the most part the same group of people who told us there was no bubble in the first place. If we haven't learned to discount these opinions yet, we probably never will.

The big question is what is coming down the pike. We know there must be some correction, but how much and how rapid is unknown in large part due to the fact that both locally and nationally we have never experienced this large of a real estate cycle.

We do know a number of things. For one, the pop is not over. Past bubbles have been years in the making, and years in the unmaking. The late '80s bubble popped in 1989, yet prices did not start to fall until 1991 and did not find bottom until 1997. This bubble popped in late 2005. We have a ways to go until the bottom is found. With a slowing national economy and a subprime market that is just now starting to show the flaws of past lending, we can expect the worst is still to come.

On the positive side, we also know that prices will not fall rapidly--real estate markets are simply not liquid enough to allow that. But they will fall.

So what advice can I give to a prospective homebuyer? For one, if you can wait, do so. There is no point in rushing into a market that is far more likely to get worse than get better. Second, if you must buy, make sure you are staying well within your means. Do not expect appreciation to bail you out of any financial holes you may be digging for yourself. The value of a home is that you get to live in it.

And lastly, recognize the bias in the opinions of the many market "experts" who earn their living by getting you to buy a house, not in making sure that you are your family get to enjoy that house for many years to come.

Christopher Thornberg is principal and founder of Beacon Economics in Los Angeles.