Don’t be misled by the steep decline in California median home prices…40% from July 2007 to July 2008, for example. Chances are goodthat your house hasn’t fallen that much in value during the same time period.

The figures are distorted by the huge number of foreclosed houses that are sold by lenders at big discounts to get them off their books. Also by short sales…a troubled borrower making a deal with a lender to get out of an expensive mortgage by selling it at the best price possible.

Right here they were right on – this is a HUGE portion of what’s driving down home prices as far as they are going.  However, I don’t think this is really distorting the numbers.  The numbers aren’t distorted.  Ask seller John Doe who’s trying to sell his house on ABC Street in Anytown in the South OC who’s competing with 3 foreclosures in his neighborhood.

Otherwise, the drop in home values is closer to 10%. It’s bigger than that in severely troubled areas, such as the Central Valley and the Inland Empire. But it’s smaller in strongholds such as Los Angeles and the S.F. Bay Area, where few subprime loans were made and there aren’t many foreclosures.

Looking at some of the posts by our San Fran bloggers, it seems that prices up there have even rolled back to 2004 prices in some areas.  Check out some of the evidence of that here.  I don’t think 10% is even close to where values are from when prices peaked.  Most homeowners who live in South OC and bought between ‘05 and ‘06 know this and so does our government.  They agree so much that home values fell that they reassessed taxes for all those homeowners for far more than a 10% loss – many saw it closer to 25% in Laguna Hills and Mission Viejo.

A side benefit of declining home prices is increased affordability.  The percentage of households that have the means to buy an entry-level home has doubled from 24% to 48% during the past year, spurring home sales.  You’ll see some slight upticks in median prices early next year, when the inventory of foreclosures and short sales is whittled down.

Honestly I haven’t researched new homebuying enough to understand if this is true or not so I won’t even try to comment on that issue.  However, I do have some concerns that the windfall of foreclosures and short sales will not dwindle in the next year as many of the arms that those who did not 100% finance have.  Many are set to expire in 2009 & 2010 and we might see another influx of such properties injected into the market.

But the housing market won’t get back to equilibrium until late 2009. That’s when homes will sell more quickly and prices will rise across the board.

And a lot of analysts agree here.  But, like my previous comment worries me that we might reach equilibrium to only have it disrupted again by a new and steady influx of foreclosed properties.