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— Although there could be "serious delinquency problems" because of the exotic mortgages, Riedy sees a soft landing. "Anything under $400,000 will continue to rise in single digits [below 10 percent], $400,000 to $600,000 or $700,000 will flatten out, above $700,000 will flatten out or go down 5 or 10 percent," he says.

"We have been in a soft landing for a year and a half," says Reeb. "In July of 2004 I started to see an imbalance between supply and demand. The available inventory has increased, prices have flattened and declined, and incentives have increased in the downtown condo market."

Large developers will work with lenders to give buyers good mortgages. "The resale market does not have that capability. Problems will hit the resale market at the entry-level segment," says Reeb.

The ultimate engine of housing demand is job growth, and that has been slowing for several years, even as home construction has continued to grow. Sales have been slipping, but "we have more product on the market than we need with current levels of job growth," says Reeb.

Campbell points out that the housing market itself has been a big source of job growth. So an implosion could affect the economy generally. He sees a high probability that Southern California home prices will plunge 20 to 40 percent. His Real Estate Crash Index signaled "sell" in August of last year and continues to plummet.

Unfortunately, San Diegans have been borrowing against the inflated equity in their homes to continue their consumption. If home prices decline and lending regulations tighten up, that game could slow. Sales at retailers, car dealers, and other consumer outlets could suffer. This will impact jobs and, in a snowball effect, further whack the housing market. An economy based on debt is risky. An economy based on dangerously speculative debt could be disastrous.

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