The unique factor this time is the exotic lending. About 80% of SD purchases since 2001 are some kind of exotic loans. That is 32,000 sales every year are either 100% financing, option ARM, ARM, I/O, stated income, or some combination. Less than 10% of buyers put 20% down.

Thus, debt service capability will be the prime factor affecting people’s ability to keep their homes.

Plus, you’ve got old time homeowners who got carried away by refinancing all their equity out. I followed some of these on realtytrac.com. You can go through the loan history, and see how the 1980’s home buyer started cashing out equity in the early 2000’s, and has no equity left. If you go on realtytrac.com, look up your own zip code. You have to pay $40/month for this priviledge.

How to quantify this? This is uncharted territory, so we have to make guesses. If 100,000 purchases are due to reset in the next 3 years, that would be 30,000 people every year, which is the current amount of homes sold. That means by next year, every single home on the market will be a forced sale. What will that do to prices? You don’t even need a single job lost to see that prices will go down in a hurry.

Now, add the data from HR Horton slashing forecast, Washington Mutual and others laying off, RE sales are off 30% thus reducing realtor income, and you see that the construction/lending/RE jobs are coming down by 30% this year. Job loss!

By fall, I think psychology will turn. With the anticipated hot spring/summer seling season that turned out to be dog, the motivated sellers have to engage in some serious price cutting to move their properties.

Nobody knows the future, but I bet my own home sale on a big decline. Likewise, I averted the NASDAQ crash, because I saw the bubble. I do not know where to put the money from the sale of my home, and I am not a savvy investor, but I do know how to avoid bubbles. I am an expert in this area. Averting the loss of money is as important as making money, so I got half of it… Now, I need to learn the other half.

I agree with Bugs.

Another point for murray: the median does NOT show that sellers are now paying closing costs, reducing their home prices by 2%.

I don’t know for sure but my impression is that it happens a lot more often in the higher price ranges and is positively rampant in the new home subdivisions. Depending on what other sales are occurring in the area it could possibly be enough to skew the average a little.

Agree that it is rampant in the new home tracts but anecdotally I believe it is more prevalent in lower price ranges with 80/20 piggyback 100% financing plus closing costs.

I think LA is fundamentally different; its quite varied in terms of employment (manufacturing, entertainment, retail, service, distribution, technical, medical, etc.) and I believe it has peaked (or is peaking) later than S.D. or Sacramento. As housing “beliefs” largely travel person-to-person, not necessarily via this website, L.A. has not had quite the word-of-mouth negativity on housing that other areas are experiencing. It is coming, however. All of the above listed employment sectors, and some I didn’t think of, relate to consumer spending and the “wealth effect”.

San Diego was the first city in CA to see double digit price gains, and is considered by one national housing analyst the “canary in the coal mine”. I read this in various articles, too, that SD is the city to watch, since it had the run-up in prices first. The thinking is that if other CA cities are overvalued also, they will follow the trail of San Diego. So basically, what is happening here, will happen in LA, SF, OC…, delayed as long as was the run-up. So if your double digit appreciation lagged ours by 1 years, so will your downturn lag by 1 year.

UCLA Anderson Forecast said Orange County will get hit hardest, because of the high employment base of exotic lending, and there will be massive layoffs in that industry.