Quote from sirpangolin:
That is not a crash. Please quit being a doomsayer. Let's be realistic here -- the Bay Area will not have a housing crash... sure, it'll top off and stagnate for a few years, but a crash?
C'mon now. 
And let's go ahead and give the readers of ET the whole story from that clip:
But with figures from November and December still to be recorded, thereâs a pretty good chance that 2005 will be a record year for sales of existing homes in Tracy. The Central Valley Association of Realtors reported 1,969 sales of existing homes in 2004, and 1,845 sold this year with two months to go. So far, July and October are the only months during which sales didnât top last yearâs figures.
Through October, the average price among the 176 houses sold was $545,563, a slight drop from the $547,080 average among the 196 houses sold in Tracy in September. Average prices also took a slight dip in May, but rebounded through the rest of the year.
Slight dips, and a $1500 gap DOES NOT a housing crash make.
Often people think their own area is very special and exempt from downturns. The people in Orange County to the south also think thats only other areas will crash. I hear the same from people in pockets in Florida, that "crashes" or severe corrections only occur in other, usually distant, places.
Of course historical real estate trends show sharp corrections in Bay area real estate prices, more specifically in the early 80's, and again in the early 90's. While it certainly is possible that real estate could, as you put it, "top off and stagnate for a few years", history is absolutely not on your side! At certain times in history "Bay area" real estate has corrected hard to the downside as the chart shows. The chart is from one of the most desirable counties in the Bay area, and the chart for Los Angeles and San Diego is a PERFECT overlay on top of it. Most all of the counties in California have turned together in agreement. ( there is absolutely nothing "special" or magical about the Bay area!)
Further, the chart never shows a "topping off", or a prolonged perfect balance between buyers and sellers. Mass thinking does not seem to work that way...either real estate is a "hot" asset class or people eschew it totally until it eventually bottoms out. Then people pick themselves up, many cleanse themselves through bankruptcy and the next cycle starts anew some years later. Interestingly in this current real estate cycle bankruptcy will be tightened up considerably and this may prolong the time we correct to the downside and try to find the bottom.
The following is pasted from a Bay area real estate blog outlining why that area has particular problems.
http://patrick.net/housing/crash.html
# Prices disconnected from fundamentals. House prices are far beyond any historically known relationship to rents or salaries. Rents are less than half of mortgage interest payments. Salaries cannot cover mortgages except in the very short term, by using adjustable interest-only loans.
# Interest rates going back up. When rates go from 5% to 7%, that's a 40% increase in the amount of interest a buyer has to pay. House prices must drop proportionately to compensate.
82% of new Bay Area loans are adjustable, not fixed. This means a big hit to the finances of many owners every time interest rates go up, and this will only get worse as more adjustable rate mortgages (ARMs) get adjusted upward.
From CBS.MarketWatch.com on 13 Jan 2005: "There is a double whammy inherent in these ARMs," said Frank Nothaft, chief economist for Freddie Mac. "At the end of fixed-rate period you face a hike in interest rates and you have to start paying principal. There is more default risk in these interest-only ARMs than in a fully amortizing product."
# A flood of risky house equity loans. Adjustable house equity loans do not have limits on interest demands. When the principal eventually has to be paid back, it can easily double monthly payments.
# Massive job loss. More than 300,000 jobs are gone from Bay Area since the dot-com bubble popped. This is the worst percentage job loss in the last 60 years. It's worse than Detroit car problems or Houston's oil bust. People without jobs do not buy houses and owners without jobs may lose the house they are in. Even the threat of losing a job inhibits house purchases. Santa Clara County posted its third straight year of job losses in 2004, so it's not over yet.
# Salary declines. From
http://www.mccallstaffing.com/need/needsal.html we hear that "salaries have in fact returned to 1997 and 1998 levels." Local incomes are not even half of what they need to be to sustain current house prices.
# Population loss. San Francisco continues to lose population at the fastest rate of any city in the US and most of those are professional jobs. The problem is not only the dot-com crash, but also the outsourcing technical jobs to India, which continues at a frantic pace as corporations realize they can pay an Indian only 20% of what they must pay a similarly qualified employee in the Bay Area. Fewer people in the Bay Area means less demand for housing. It recently (Aug 2005) cost $3623 to rent a U-Haul from San Jose to the midwest, but only $1800 to move the other way. This is because far more people are moving out of the Bay Area than are moving in.
# Stock market crash. The NASDAQ at about 2000 is still only 40% of the 5000 it was at the peak of the recent stock market bubble. The crash in the NASDAQ probably hit the Bay Area harder than anywhere else because of all the stock held by employees of tech companies. That money would have been spent on housing, but is now gone.
# Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss, he's bankrupt in the real world. Even a small price decline will bankrupt buyers with small equity. Buyers foolish enough to buy with no money down are already bankrupt, but still unaware of the fact.
# Shortage of first-time buyers. According to the California Association of Realtors, the percentage of Bay Area buyers who could afford a median-price house in the region plunged from 20 percent in July 2003 to 14 percent in July 2004.
# Surplus of speculators. Nationally, 25% of houses bought in 2004 were pure speculation, not houses to live in. It is now possible to buy a house with 103% financing. The extra 3% is to cover closing costs, so the buyer needs no money down. All this is on the unwise assumption that housing will rise ever higher, covering interest payments through appreciation. Even the National Association of House Builders admits that "Investor-driven price appreciation looms over some housing markets."
# Lightbulbs going on in many brains in the Bay Area: "Hey, I can just go to New Mexico or Oregon, buy a gorgeous house outright, and comfortably retire on the price difference. My neighbors just did it, so I'll have friends there too."
# Trouble at Fannie Mae and Freddie Mac. They are now being forced to tighten up sloppy lending. This means they are not going to keep buying very low-quality loans from banks, and the total money available for buying houses is falling.
# The best summary explanation, from Business Week: "Today's housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. In either scenario, housing will weaken. Caveat emptor."
