US housing prices: 44 percent overvalued.

Robert Campbell published the fascinating Campbell Real Estate Timing Letter (858 481 3235). Robert is an expert on California real estate. He called the turn to the downside in Cal real estate in August 2005. In his latest report, Robert writes -- "Anyway you look at it, this has been a housing bubble of unprecedented proportions. Based on historic inflation adjusted norms, from 1996 to 2005, US housing prices are 44 percent overvalued. (This is calculated by taking the 4.4% difference -- a 6.8% minus 2.4% -- and multiplying is by 10 years). That's why I feel there will be a significant mean-reversion in US home prices, and I believe that it's not only going to be 5 or 10 percent of rice gains that get erased."

San Diego has been the hot spot in California's red-hot housing industry. The latest figures show that the median price of a home in San Diego has actually declined slightly in June on a year-to-year basis. This is the first time in ten years that the year-over-year median price of a home in San Diego has declined. There are a lot of homes for sale here in San Diego. In some cases, price concessions are being offered. But what has changed is the bids. The bids are drying up. Prospective buyers are holding off -- they're all waiting for lower prices.

There are exceptions, however. The word is that the late Aaron Spelling monster home in Beverly Hills just sold for $135 million (asking price was $150 million).

The SPDR Homebuilders ETF. From roughly 47 last April, the Homebuilders ETF has dropped to just under 30, a decline of 36% in three months. If we are to believe this chart, then it can be said that the homebuilding industry is close to crashing. In view of what's happening in homebuilding, it's would be very risky to raise rates.