Time to pull off the rose colored galsses and realize a few things:

1. most people in these properties couldn’t afford to buy their own homes again at today’s price levels, that says a lot about the situation we’re in.

I know this is an extreme example but here goes anyway: I have a client that purchased his Carlsbad oceanfront estate in the mid-1970’s for $70,000. It’s probably worth about $5M today. He couldn’t buy his house today nor could 99.99% of the US population

2. Without the use of exotic lending there are virtually no first time buyers in the market at today’s prices. Exotic lending is rapidly dying.

First time buyers today are young couples that tend to marry much later than a decade ago and frequently have 6 figure incomes. Sure prices are high but IMHO nowhere near double of where they should be. Also some first time buyers in this area are not 1st time buyers, they come from other areas of the country where they are are moving down in size but not price. There are also move down buyers purchasing entry level homes.

3. Upgrade buyers are wiped out because of #2. If they can’t sell their own home, they cannot move up…it’s a chain reaction.

See above.

4. Loss of Real Estate jobs (30% of OC jobs), increasing interest rates, ARMs resetting with foreclosures starting to skyrocket, tighteing of lending standards (#2), more job loss due to recession caused by sharp contraction in spending (no more HELOC money)…how is all this going to bode for the future of home prices?

That’s a good question and something no one has a handle on. Just like my golf swing: Anything can happen and it probably will.

I’m not necessarily disagreeing with what you are saying but rather pointing out that there are counters to each of your points. It will be interesting to see how it all plays out and nothing would surprise at this point in either direction.