The good news, according to the Los Angeles Times, was that Southern California housing prices were up 19.6% in December, a harbinger of better things to come as the nation attempts to climb out of its long housing slump. “We haven't shifted from bust back to bubble, and nobody should think we have, and nor likely will we,” Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA, told the newspaper.

The bad news? Prices might be up principally because of a rapid decline in housing inventory fueled by hedge funds and foreign money scooping up properties for cash and renting them out. Nationally, there were 33% fewer homes for sale at the end of 2012 compared to a year before and California led the way, according to Redfin.

The Sacramento metropolitan area home inventory was down 71.4%, San Francisco 68.1%, San Jose 67.9%, Los Angeles 61.2%, Inland Empire 57% and San Diego 56.7%. Newspapers are filled with stories of homes receiving multiple bids on their first day of availability, forcing sales prices higher and bringing smiles to the faces of real estate sales persons everywhere.

Rising prices can bail out homeowners who are underwater on their mortgages, encouraging them to put their homes on the market and increase the housing inventory. That prompted Capital Economics economist Paul Diggle to tell the Times that this “virtuous cycle of rising activity” is undoubtedly a good thing. Foreclosures are down and short-sales are up.

In the murky world of real estate, it can be a fool’s game to assign cause-and-effect to price fluctuations. The rise in prices could be a healthy market response related to a drop in unemployment, population shifts, the sorting out of troubled mortgages, general economic improvement and homeowner optimism. 

Or it could be that the huge drop in inventory, an influx of foreign money, hedge fund investments, bank’s playing games with dicey mortgages and opportunistic flippers are re-inflating the housing bubble that burst so dramatically four years ago.

Natural housing appreciation or manipulated bubble? A new era of investment and growth or better games in the casino? Dramatically declining inventory brings a new spin to an old discussion. 

–Ken Broder  

To Learn More:

December Home Prices Jump 19.6% in Southern California (by Alejandro Lazo, Los Angeles Times)

California Housing Inventory Disappears into the Sunset (Dr. Housing Bubble)

Massive Inventory Shrinkage Hits First-Time Home Buyers in California (Zillow)