San Diego housing is vastly overpriced

In an attempt to stimulate the faltering economy in the wake of a stock crash, a recession, and the Sept. 11 attacks, Alan Greenspan and the Federal Reserve had embarked on a rate-slashing frenzy that would not stop until the Federal Funds Rate had gone from 6.5 percent down to a multi-generational low of 1 percent. Unfortunately, what the Fed primarily succeeded in stimulating was a wave of unprecedented lending excess in which rates and lending standards dropped dramatically.

It was like pouring gasoline on a fire.

Rather than flattening out, San Diego home prices exploded into 2003 and 2004 on the wave of easy credit. Homebuyers' sense of invincibility and optimism was now absolutely ubiquitous, and people's willingness to take on more risk grew as fast as prices. Lending begat more lending and the borrowed money drove home prices ever upward. Lending institutions, emboldened by the rise in the value of their collateral, started to lend more and more freely.

By 2004, home prices were well beyond all rational measures of fair value, but that didn't matter. No price was too high to pay for the money-making machine that was a San Diego home. The early-2004 bout of panic-buying represented the peak from a sentiment standpoint, but home prices managed to claw their way even higher into 2005.