Words almost fail me at how cool this website is.
But first you need to know the issue.
Real estate as you primary residence is probably the best investment that you can make for the future. We've covered this in a previous post, and if you are not thinking about moving into a house you probably aren't thinking correct.
However, let's talk a bit about overheated markets, like Southern California.
Let's assume you do all the right things. You look at a bunch of houses (the average buyer looks at 3 to 4). I think you need to see at least 20 or 30. You have a good idea of good construction and bad construction. You have an appreciation for what factors are going to hit your targeted neighborhoods.
You think you will know when you find a bargain.
The only question is "how is the overall market?" Real estate markets will often get overheated, and then the local market prices for house may fall. I had a friend who had this happen to him in Oakland, and he got hurt for many years since he lost 1/2 year's salary because his house went down in value, and he decided that he needed to move. (If, by the way, he could have staid at the same residence another 10 years, he still would be patting himself on the back for such a great bargain. Eventually, the market caught back up and handily passed th old mark. The damage is that you buy, the market goes down, and you are forced to immediately lose a bunch of money because you sell the house for a lot less than you bought it.)
Now this is very fickle to figure out. I have personally seen some people say "I'm waiting for the market to turn" and it simply never does. I would suggest that in some areas of the country the market may turn, and I think the folks at this keen website have a great tool for many major metro areas.
If you look at the inserted JPEG, you'll see a map of the USA. Based on a bunch of different factors (population density, income etc), they figure out if an area is overvalued or not.
So back to my neck of the woods, Southern California, you'll see a lot of red. Therefore, a lot of potential for the market to go down in value. If you lived in Southern California, I would carefully think through the following:
1. Can I find a new construction housing at a bargain? Buying a new house from a good builder normally helps you. A lot of problems that pop up in 30 year old houses don't exist in new houses with new codes. Not that you can buy without thought, but new housing generally is more energy efficient, stands up better in an earthquake, and is build with modern materials. When the market slows, however, new housing is really, really stuck. The builder has investments tied up in houses. This is death for a builder. He can't afford to have a bunch of empty houses sitting around. So if the market is slowing down, and he had a bunch of houses coming, now is the time to strike! This could be a great bargain time. With pre-owned houses, the owners simply don't move, and the pool of houses get smaller.
2. How quickly will I have to move? Again, like my friend, the worst possible thing is to buy a house and be forced to move because of a new job or change in life. So the less stability you have in you life, the less you should think about buying now.
If you go to the website, you can do context sensitive histories of the areas on the chart. They'll plot out the progression of each colored area.
If you are worried that you area is over valued, I would allow check out this site and see what their analysis says....