Ed Leamer’s analysis of home prices in the San Francisco Bay area is summarized.

His findings: In the Bay Area, the average P/E for a house shot up to 13. 8 in the first quarter of 2004, compared with 7.2 in 1999 and 2000. Today’s ratio is more than a third higher than it was 1989, just before housing prices started a multi-year descent.

In Santa Clara County, the average P/E is 15.8 today, compared with 10.3 in 1989.

“We are in a situation that is more extreme than it was in 1989,” says Leamer, director of the UCLA Anderson forecast.

Brad DeLong’s reaction is exactly the same as mine.

Personally, I think we are in an interest rate bubble–and that high housing prices are (outside of New York, SF, and LA) probably a rational reaction to very low interest rates.

I’m on an email list where people have asked about how to speculate against high home prices. My response, like Brad’s, is that home prices are too high if and only if long-term interest rates are too low. If long-term interest rates are too low, then the easiest speculative strategy is to short long-term Treasury securities in the futures market.

But if you don’t want to bet on economic forecasting (and I would not blame you if you don’t), then the easiest strategy is to put money into a combination of money market funds and a stock index fund that tracks the world market.

For Discussion. Real estate agents always say, “Now is a great time to buy a home.” Could they be wrong this time?