I'd say Seattle is in a bubble but is lagging San Diego, LA, and Bay Area. The party is already ending in CA - inventory is way up, sales are down, and there is evidence that prices are coming down, at least in SD and Sac (looking at comparable houses, not the median, which is still going up, which is expected).

For the bubble view:
[link|http://thehousingbubbleblog.com/|http://thehousingbubbleblog.com/] with links to more
SoCalMtgGuy isn't very active now, but his site [link|http://housingbubblecasualty.com/|http://housingbubblecasualty.com/] has explanations of option ARMs, I/O loans, 40 and 50 year loans, etc

Another interesting thing to do is to find information on the various sales of a single house - and see how much the selling price for a given house has increased since, say, 1998. Now think of valid reasons for the increase: How much inflation has there been? How much have wages increased (or decreased)? How much have rents increased (or decreased)? How much have jobs increased (or decreased)? How much has the population increased (or decreased)? None of the numbers for the Bay Area support the housing price increases we've seen, and I'm pretty sure Seattle is the same.

Then find the numbers on mortages - what percent is option ARM, straight ARM, Interest Only, the average mortage payment, and percent of income devoted to housing. In the Bay Area, the percents for Interest Only and ARM are very high - recent numbers are over 60% of new home loans are interest only. Also consider that interest rates are rising, more and more ARM loans are adjusing (something like $500 billion in 2006 and $1.5 trillion in 2007), and foreclosures are already increasing.

Based on all that, I'd say there's a very good chance house prices are going to be lower in two years, so if you buy a home, there's a good chance you might get stuck for a while. If that risk is OK, and you can pay the mortgage, taxes, insurance, utilities, and maintenance, then it may make sense to buy even if prices fall.

--Tony