I am not sure exactly what this is doing to the sellers. Most of these would have been jumbo mortgages if they were purchased in the past 7-8 years and not sure what kinds of additional financing are typical. I know at least one real estate agent around here who has been studying short sales (suggesting that even around here with lots of $1 million plus properties) there are problems. Another who has been in the business for a long time got rid of a whole bunch of listings recently after telling the owners to either drop their prices or get dropped by her. It is soft, and it is difficult.

[In fact, many of the young hipsters who have moved into a variety of remodeled old cottages and ultra-modern open-plan townhomes are most certain to not have had 20% down on their million-dollar purchases, so the liklihood of exotic mortgages, seconds and adjustable-rate features is high.]

Even with prop 13, tax revenues here do rise over time because the houses are re-valued to the full purchase price whenever they are sold. California has always been a bit more transient than many other places and policymakers have been able to count on these ongoing resales to keep the tax base increasing, even if not as quickly as the actual underlying values. Now they are looking at the possibility that the tax base could flatten or even shrink, as prices decline. This is the same thing that happened (also under prop 13) in the early 90s. Herb could probably provide better commentary about that period than I could, as I was not here at the time.

Another factor is a reduction in the number of new houses that will be built, and the lower prices they will fetch. The economists in Sacramento had their models showing lots of new houses at higher and higher prices. They budgeted based on those projections and the legislature has already spent the money as if it were a sure thing. A reduction in those numbers means less money than they thought they would have and will have to make tough choices.

[Typical government accountants. Extrapolate the current trend to infinity, then commit to spending it all, even though we know that things always move back and forth, and that that long-term growth rate is pretty steady at about 3%. Of course, when things go down it's only temporary and one need not consider long-term adjustments to our expectations and our spending.]

It’s going to be a rough time.

-btc