Hardest hit, IMO, are outlying areas, condos, and builder tract subdivisions. Forget Temecula, Valley Center, San Marcos, El Cajon, Lakeside, and rural Poway where I sold my home (too remote).

Demand will stay high in coastal areas and near the cities. But who can buy these homes? So what if demand is high if the bank doesn’t want to give you a loan? What happens if the bank doesn’t have the liquidity to give the loans? Fannie Mae’s underwriting guidelines may seriously shift, and MBS investors might shun those products, instead preferring the high returns and safety of Treasury bills.

When credit dries up and buyers need 10% down, the demand for $1mil+ properties will shrivel up. How low will those houses go? The lot premium can really shrivel up; how about today’s $1.6 mil home for $800K? I can really see that happening, mainly due to the low wages here.

My musings are an extension of bugs’ comment above. We really don’t know how much lending will tighten up, but we need to remember that housing prices skyrocketed because subprime lenders, who are slowly going bankrupt, gave liar’s loans at 0% down to borrowers with FICO scores under 600.