[C26]California Dreaming Michael Chapdelaine

Not too many years back realtors were knocking on doors trying to find listings because property values were shooting up. It was reminiscent of Tokyo real estate in the 1990's, a time when any fool could make money in real estate.

In January California home foreclosures equaled the number of sales, a daunting figure if there ever was one.

For a while the getting was good and any investment today would be worth more tomorrow. In that kind of environment subprime lending -- lending to the marginally creditworthy -- began to flourish.

Even the lower paid and unskilled could jump on the real estate boom and improve their net worth and equity by signing on the subprime dotted line.

Call it greed, flipping, speculation, gambling or just bad business; call it any of those things but it has led to the worst housing crisis California has faced. The crisis is particularly bad in California's interior.

Upscale coastal areas such as Santa Cruz, Carmel, and Monterey have had a steep decline in housing values but because of the demographics and desirability, the decline has not been as severe and is not expected to last as long.

"We only have about a nine month inventory which is not bad," said one Scotts Valley realtor, "some places like Miami have over a three year inventory which means that it will take years for that market to recover. Part of that is we are in a 'no growth' area so there isn't a great influx of new homes on the market. We're lucky."

That is because the most desirable areas have very few first time homebuyers. The upwardly mobile real estate treadmill is particularly hard when the median home price exceeds $700,000. Many of these "outside" buyers do not need financing.

Upwardly mobile locals are not buying up homes in Pacific Grove and Capitola. Non-locals from other parts of the United States and foreigners make up the bulk of home buyers. And as such, the demographics and "look and feel" have changed.

No longer is Santa Cruz the hippie haven for artists; all the starving artists couldn't afford to starve anymore and have moved out. What was once the bastion of far left liberal thinking is now slowly turning into a techie "Arnold Republican" free zone.

In towns like Watsonville and Stockton banks and construction companies are bringing in buses for foreclosed housing auctions. Rumors are rampant about cheap homes and rumors fuel speculation; what homebuyer wouldn't like a 50% discount?

"But buyer beware" said one realtor, "the truth is both the banks and construction companies are sending in their own 'dummy bidders' to drive up the auction price."

"They know what they want to get for the house and they drive up the bidding to get to that price. The banks and construction companies can't lose: they either get their price or don't. They are not going to take it on the chin...at least just yet."

Part of the boom in the interior was caused by Bay Area commuters looking for more affordable housing that they could pay for with high paying Bay Area jobs. But as gas approaches $4 a gallon commute costs have skyrocketed.

So the poor commuter is not only seeing their home equity plummet but their commuting costs are constantly going up. For many Bay Area commuters, buying in Tracy or Merced was a big mistake.

Even many of the Latino immigrants have decided the American Dream is no longer for them. Most can tell of a cousin or brother that signed on the subprime dotted line and then walked away when they could not afford a $3800 a month mortgage.

Many of these immigrants are now saving up and planning to return and buy property in Mexico, which in many areas of Mexico is affordable if one earns U.S. dollars. Mexico is the next real estate boom.

The California real estate industry itself is in a transition as it is going through a decline, consolidation and subsequent "shake out."

"The hobby and part time realtors have closed up shop and gone back to what they were doing before the boom," said one Aptos realtor, "some are getting bought up by the bigger players who are better positioned to weather this storm."

We'll see how this plays out. Just remember it has taken Tokyo a good decade for the real estate market to correct itself. It's just not clear if California actually has a decade to make that correction.