Are California Home Prices About to Drop?

The LA Times had an interesting article about prices in the San Diego area in the Sunday August 7 edition. The premise of the article is that if prices decline in San Diego are other California areas next in line for big price corrections?
They postulate that as San Diego was one of the first "Hot" areas in the nation on rising home prices it may be one of the first to go south with home prices dropping. While other areas in California are still seeing double digit price increases, San Diego has only seen a 6.3% increase so far his year. Homes appear to be staying on the market longer and prices are beginning to be negotiable. This may not be all bad and perhaps just a correction of the long upswing in pricing in California real estate.
However I thought two items were of special interest in the article. The first was the large number of speculators in the San Diego market... about 14% in June. If these guys can't sell to cover their costs they will take a big loss or walk away to get out from under payments they can't make. The South Bay doesn't have nearly that much speculative buying. Most of homes in our area are owner occupied.
The second was that San Diego has more piggy-back and interest only loans then other areas. These loans are becoming areas of concern for lenders and the Federal Government is finally issuing stricter guidelines on many of the "qualify anyway you can" loans. When the government realizes things are out of control with lenders you know there is trouble coming. All you need is a big uptick in rates or a loss of jobs and most of these buyers won't be able to make their payments. While a market correction is definitely coming those two factors may make it tougher for San Diego then other parts of the state. The PMI Group in their Economic and Real Estate Trends report says that of the ten riskiest real estate areas that will see price declines six are in California... San Diego/Carlsbad/San Marcos, San Jose/Sunnyvale/Santa Clara, Santa Ana/Anaheim/Irvine, Hayward/Oakland/Freemont, San Francisco/San Mateo/Redwood City and Riverside/San Bernardino/Ontario. Salt Lake City and Denver were also on the list which is interesting as the Denver market has been down for the last few years and is just now seeing a 2% price rise.
You can bet price declines will take a toll on markets in Nevada, Arizona and probably Florida. All of those areas have seen very heavy investor activity and lots of flipping. If the market goes south these will be some of the first areas to be hard hit. Which means that investors will turn to other markets.. who knows maybe Texas, Alabama and Mississippi will be the next hot spots.
So what about the South Bay? We will definitely see some market slowing. A market correction will happen as fewer and fewer people can afford to purchase. I'm guessing you will see it start as regulations on mortgage lending become stricter and rates get close to 7%. So maybe end of this year or early next year. The Fed will boost rates at least three more times before the end of the year.
I believe that a bit of a slow down in prices will benefit everyone. I don't believe you will see a big price drop just a small correction to allow consumers to catch their breath and get ready for the next chapter of California Real Estate.