Southern California is known for boom-and-bust cycles, and most see boom, followed by a slight drop, followed by years of no nominal gains (thus, a yearly shave by inflation… rougher when inflation could be high single digits).

What sets this bust apart is the must-sell caused by ARM resets. If the initial drop is big enough, many homeowners will be underwater, and not able to refinance. So, the size of the initial drop (the period we are in) has a multiplicative effect on the ultimate number of people who will be squashed by the reset.

I think it’s a close call, but reports of fraud make me think the capital markets will be pissed off enough to cut off funding, making refinancing a bitch, and pushing enough homeowners to the brink to give a double-dip drop pattern, rather than the more typical years-of-flat.

Painful as that may be, I agree that more affordable housing would be a long-term blessing for the area, and worth the short-term pain. (Due anguish to those who will lose their homes [though I don’t buy most of the “I didn’t know…” crowd… more like they didn’t want to know].) A bailout would screw us twice: once with our tax money, and once again by keeping homes unaffordable. No pain, no gain, baby.