Great point, you are spot on. However, if you have ever travelled to Shanghi or Bejing, a well to do business man has to pay 500-700k up for a townhouse close to work. So a house with land over here close to work and friends is a steal. Although China has their problems, their GNP is 9% or more; way ahead of us. Many of us are in denial about this aspect that they can pay for houses here much like we used to when our middle class was healthy. Since they own most of our debt, they can obtain good deals on foreclosures in bulk with our banks that they have some of their money in. Although China will get hit by the recession/depression, they still have many buyers trying to dump the US dollar and buy our real estate. Their philosophy is to possibly lose a smaller percentage on choice real estate, than to lose big on holding worthless dollars. The Dr. is correct in that we are basically flat on our ass concerning employment and upside down mortgages for years, even decades. Without a productive manufacturing base, we will never have a sizable middle class again. Others will take our place as they are starting to do in ernest.

However, do not be fooled by the mirage. The middle price range of $500k may be the bottom of pricing for middle to upper market homes on the west side. As the bubble continues to deflate, what you will get for $500k will get better and better. The greater fools are jumping in now with their hard earned cash and as they say, a fool and his money are easily parted. Higher priced homes will languish on the market in the $600′s and $700′s and $800′s. In order to sell they will need to lower their prices into the $500′s and lower $600′s because they will continue to languish at higher prices. In a few years, the home referred to above that just sold for $500k a few months ago will have to sell in the $300′s or $400′s to compete with the deals to be found in the $500′s.

Furthermore, $500k or $600 makes sense for a dual income household earning $150k, $200k, $250k a year, because it’s 2.5x to 3.5x income with a decent down payment. The $700, $800k+ homes are really screwed when there are multiple bids for homes in the $500′s. That’s what people want and that’s what they’re paying. That’s the market is with tightened lending standards, that’s the bottom of the middle-upper housing market, it’s in.

Now it’s just time to wait for the languishing homes to reduce their prices to the level where people can afford to pay. The bottom’s in people, give it time and be patient, there will be deals to come but it will take years for the market to normalize, especially out there in whacky CA.