With California's home prices showing disturbing signs of a late 1980s-like bubble, analysts are now looking at how regional weakness could affect valuations in the MBS market, specifically the jumbo sector.

In a recent report, JPMorgan Securities analysts stated that California's strong housing market has in the past year become potentially unsustainable, characterized by the significant leverage seen in the late 1980s California bubble. For instance, the ratio between median home prices and median incomes rose to over 7.5 by 1990 - which was over twice the national average. As home prices dropped in the early 1990s, the ratio of price to income readjusted to roughly four. It has been steadily increasing from the mid-1990s and is now almost 7. Recent National Association of Realtors data showed prices for new California home sales decreased slightly, the only region to display a drop.

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