Question: Many people I've spoken to predict that home prices in Irvine, Calif., will keep increasing, though maybe at a slower rate, even if there's a drop in real-estate prices in other parts of the nation. We are in the process of buying a two-bedroom condominium in that area right now. Do you think we should go ahead with it?

-- Shweta, Orange County, California

Shweta: No matter what your Realtor says, just remember: No one can predict house prices. They may keep rising for years. Or they may start dropping next week. In my view, though, the risks of a decline increase when prices rise much faster than incomes, as they have in Southern California.

Even by California standards, price increases in Orange County have been striking. In May, the median home price was $662,290, up 41% from a year ago, according to the California Association of Realtors.

Should you buy the condo? That depends on the answers to several questions:

• How long do you expect to live there? If you're likely to move within three years, you might want to consider renting. After such an extreme rise in prices, you can't be sure of further short-term gains to offset such costs as mortgage fees, repairs and any real-estate commission you will need to pay when you sell the condo.

• Is the price of the condo in line with comparable homes recently sold in the neighborhood?

• Can you afford the monthly payments? If you plan to take out an adjustable-rate loan, be sure to consider whether you could still afford the payments if interest rates rise sharply and stay high for years. Don't assume that today's low interest rates are the norm.

If you feel comfortable with your answers to those questions, you probably have a good case for going ahead with the purchase.

If you're buying for investment purposes, however, you should weigh other options. At the very least, price increases will have to slow down as more and more people are priced out of the market. And prices do sometimes fall. As you may recall, house prices did drop sharply in parts of Southern California a decade ago; data from Fiserv CSW Inc. show that prices in Los Angeles dropped about 29% from 1990 to early 1996. (Adjusted for inflation, the drop was 40%.)

As usual, Realtors are sounding chipper. Ann Pettijohn, president of the California Association of Realtors and a broker/owner at Oaktree Realtors in Orange County, disputes reports that prices already have started falling in your area. "I think our market is still healthy," Ms. Pettijohn says. Only people who overpriced their homes are having to cut prices, she believes. "People who are asking an outrageous price may be sitting a little longer than the good old days of 10 offers in the first few hours it was on the market," she says.

-- Mr. Hagerty is a staff reporter for The Wall Street Journal. His "House Talk" column appears most Fridays on RealEstateJournal.com. E-mail him your questions about the residential real-estate market. Please include your first name and city and state. If your question is answered and posted, we will show your first name and city. Due to volume of mail received, we regret that we cannot answer every question.

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